Hello Everyone.
I am not able to understand that :
What’s the Difference Between the BOOK VALUE and the INTRINSIC VALUE of a SECURITY…???
Would Welcome any answer.
Simply put, you can view book value as “accounting value”, it’s the value shown on financial statements (balance sheet). The book value shows what is acceptable according to US GAAP/ IFRS.
Intrinsic value is the “actual” value including all aspects of business including tangible and intangible assets, using fundamental analysis (qualitative and quantitative aspects) to estimate the true value of the security. Usually analysts use this intrinsic value to compare with market value, to see if a security is over/under-priced.
Thank You.
book and intrinsic the same stuff.
yes NaNa is right. However, as an analyst, you do comparables all the time to find the intrinsic value… So we intechange EBV and IV all the time.
Book value is what the company is worth if you liquidate it right now (before liquidation transaction costs).
Book value does not capture the present value of future free cash flow I.e. the value of future business profits. Intrinsic value should include the value of this too, unless its clear that the company is not a going concern (i.e. About to go bankrupt). There are lots of debates about how to go about measuring the value of future business. It is inherently an uncertain number, but it is still important to try to capture it in order to determine intrinsic value.
^
I doubt most places could get NBV for their capital assets in a liquidation scenario. Under IFRS they don’t have to take an impairment to fair value less selling costs either since the recoverable amount is defined as the higher of liquidation value and value in use (future cash flows). IAS 36 Inventories also aren’t carried at liquidation value and aren’t impaired until the the net realizable value from selling in the ordinary course of business (future cash flows). IAS 2
It can go the other way too where book value is well below liquidation value, e.g retailers buying land decades ago that is sitting on the books at cost.
Disagree with this.
In my above example, if the book value is $18,000, and I can sell it for $13,500, then if I liquidate right now, my value is $13,500, which is different from $18,000.
Bchad doesn’t account for appreciating assets, or assets that deviate from their book value (like almost any asset will).
I put in a disclaimer that you’ll take a hit if you actually do liquidate. Though you can disagree that transaction cost is a fully descriptive word.
And you can take book value at face value like any other financial statement, or you can adjust it like any reasonable analyst will try to do.
The concept of what book value is is that it’s the assets minus liabilities and it misses the value of future business income if you only use BV for valuation and nothing else.
This is not exactly accurate for options. The intrinsic value of a call option is the current share price minus the exercise price. Unless the option expires today though, that is not the price you would sell the option for, which is what I would call its’ “actual” value.
You are right, options are different but when the OP said security, i wasn’t thinking about options…
Well, options don’t really have book values. I suppose someone writes their values in a book (or on a screen), though. Perhaps that counts.
I guess it’s worth noting that “intrinsic value” has a different meaning in the options world than in the fundamental equity and fixed income world.
Options and other derivatives most certainly do have book values. If company A buys an option to purchase x% of Company B at some future date, the purchase price of that option goes on their balance sheet and any change in the value of the option over the course of its life runs through the income statement.
Ok, so it goes in a book, as I said.
So, both “intrinsic value” and “book value” mean different things in the option world and the fundamental equity world.
Sort of like how “Low” and “L’eau” have different meanings in English and French, even though they sound nearly identical.