Book Value and Intrinsic Value

Warren Buffett pointed out the difference between book value and intrinsic value.

"Book value is what the owners put into the business, intrinsic value is what they take out of it."

In another explanation offered in a 1996 Berkshire Hathaway annual report, he likened book value to college tuition paid, with intrinsic value being the income resulting from the education. The education and the dollars spent on an education mean nothing unless there is a resulting financial return.

The point: It's easy for investors to put too much emphasis on book value and not enough on intrinsic value.

Book Value (Net Asset Value)

Synonyms:
Net asset value
Book value
Balance sheet value
Tangible-asset value
Net worth

= Total value of a company's physical and financial assets minus all its liabilities.

It can be calculated using the balance sheets in a company's annual and quarterly reprots.

From total shareholders' equity, subtract all "soft" assets such as goodwill, trademarks, and other intangibles.

Divide by the fully diluted number of shares outstanding to arrive at book value per share.