The term book value is an accounting term that simply refers to the value(s) we record on the books for the various accounts tracked by a company. We track the values of the resources a company has to work with, namely assets. We track the values of the obligations assumed by the company to help support its asset structure, namely liabilities. The excess of the assets we record over the liabilities we record is the equity, the remainder that represents the net book value of the company.

The net book value of the company then is the accounting value of the company and therefore is also regarded as the net (accounting) worth of the owners of the company (i.e. stockholders). When speaking of company equity, we often refer to it as the company’s book value (dropping the term “net” from book value), net worth, or net assets.

The book value of a company’s equity is found on the balance sheet. Also found on the balance sheet is the detail of the equity, namely assets and liabilities.  I discuss all this in my book, Choose Stocks Wisely.

Participants in the stock market are repricing the equity of the company each day with every fluctuation in the stock price. The pricing of the company’s equity on the stock market is referred to as market value. The current stock price times the number of company shares outstanding is referred to as the market cap of the company. Rather than an amount that is booked (book value) for the equity by a set of accounting rules, market value is an amount that is determined aside from those rules and represents the stock market’s best momentary attempt at sizing up what the company is actually worth.

Conservatism is a basic tenet of accounting rules. It leads to a rule structure that attempts to avoid overstating the company’s equity. Since accounting rules attempt to avoid overstating the worth of equity, they often lead to understating the true value of equity. As evidence, the majority of stocks trade at prices that assign a market value to equity that is higher than its book value.

If you’ve read my book, you know that my method attempts to find companies trading below the book value of the equity. Further, the method revises book value such that I come up with an even more conservative number. By doing this, when I find the market assigning an equity value to a healthy company that is at or below my discounted revision of the (already conservative) book value, my interest toward investing is captured to the point of investigating further. That’s because I may have found a company that is trading at a price that meets the definition of a “low” price where risk of loss is greatly lessened. This is how I go about choosing stocks wisely.