Net Book Value
What it is:
How it works (Example):
Here's the formula for net book value:
Net Book Value = Cost of the Asset - Accumulated Depreciation
Assume Company XYZ bought a MegaWidget for $100,000 three years ago. The MegaWidget depreciates by $10,000 a year. Thus the net book value of the MegaWidget is:
$100,000 - $10,000 (year 1 depreciation) - $10,000 (year 2 depreciation) - $10,000 (year 3 depreciation) = $70,000.
Why it Matters:
Net book value is one of the most popular financial measures, particularly when it comes to valuing companies. It can be used in regard to a specific asset, or it can be used in regard to a whole company.
It is important to note that net book value almost never equals market value. This can happen for a couple reasons. First, assets are listed on the balance sheet at cost, meaning their balance sheet value is not updated as prices change. A company that holds a lot of real estate on its balance sheet will likely have a net book value far below its market value.
Second, companies have discretion over how quickly or how slowly they record depreciation. If a company uses accelerated depreciation, the market value of the asset will exceed the book value of the asset in the first several years of the asset's useful life. For example, if Company XYZ sold its three-year-old MegaWidget for $90,000 today, it will likely have to record a $20,000 capital gain ($90,000 sale price - $70,000 net book value at time of sale = $20,000). There is a $20,000 difference between net book value and market value.
To learn how to use net book value in your analysis, click here to read, A Simple Method for Calculating Book Value.