Analysis of Asset Allocation

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Fundamental Analysis: Book Value
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Description

When an investor buys stock, he's actually purchasing equity in a company. To measure this the concept of Book Value has been introduced.

The formula is:

Book Value = Shareholders' equity /Number of common shares outstanding

Generally stocks are traded above their book value. The difference between the price and the book value is the premium paid by the investor that represents the future earnings and the goodwill.

But you can find also some companies traded under their book value. This can reflect some uncertainty on the operations of the company or some doubts on the assets valuation. In the depressed market, you can also find some good quality companies traded under their book value. The companies traded below their book value  can require much greater patience than stocks coveted by the public, but rewards are usually greater.

In the next pages, we will focus on earnings.

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