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Another strategy to use when looking at the true value of a stock is to take a closer look at the book value of a stock. This refers to the value of the assets in a stock minus the liabilities and any intangible assets the company holds.
The book value refers to the value that an asset holds on a balance sheet. It measures what the shareholders of the company would receive in the event that the company is liquidated. This is an estimate, but it deserves to be explored. The most important point about the book value is that it measures how a business functions. A business with a better book value should be one that has enough assets to keep it operational.
The Main Concern
There are concerns surrounding how the book value might not work every time. A business that is growing quickly might have an inaccurate book value as the business is trying to accumulate more assets and is looking to make some real changes in how it operates. Businesses that have fewer physical assets might be a problem. For instance, a bank stock might have a large book value because that bank has several physical branches and ATMs. An online bank stock is different in that the online banker does not have those branches and that bank might not have many or no branded ATMs. Like with any other measure, you have to consider what the book values are for multiple businesses in the same sector. Think about what is causing a business to spend so much on their assets just to keep their general operations stable and functional.
The intangible assets that a business has could also be a problem. Maybe a business’ reputation has been damaged because of a legal issue or a controversy surrounding a certain product or service. Although that reputation might be repaired over time, it could put a dent in the stock. It is not easy to get a precise measurement of the total impact that such an issue might have on a stock.
When looking at the values of stocks, consider how a business operates while reviewing its sales, earnings growth, and book value among other points. There is a real chance that a stock might be a better deal than what you think it could be.
