Book value, explained

QWhat’s a company’s book value? — G.H., West Palm Beach, Florida

ABook value is an accounting measure that investors sometimes look at to get an idea of a company’s intrinsic value. Boiled down, book value is simply the company’s total assets, less its total liabilities. It’s showing you what shareholders would own once debts and liabilities are covered.

Book value’s usefulness has shrunk somewhat as our economy has evolved. It worked well when most businesses were simpler and capital-intensive, with assets such as factories, equipment and land appearing on the balance sheet. It works less well today, though, as there are gobs of service-oriented companies and high-tech companies that are heavy on intangible assets, such as patents and goodwill (an accounting measure often tied to acquisitions).

Consider Facebook, with many assets that don’t register significantly on the balance sheet: intellectual property, employees, a strong brand and a massive worldwide network of customers. As of the end of 2019, its total assets were $133.4 billion and its total liabilities $32.3 billion, leaving a book value of $101.1 billion. That’s far less than its recent market value of roughly $540 billion.

Consider, too, a company that owns many buildings: Over the years, their value on the balance sheet is depreciated, eventually to zero. They’re not really worth zero, though, and they can even appreciate over time. Such a company can also be worth much more than its book value. With many companies, your best bet is to ignore book value. Q

What’s an ETF? — R.M., Barre, Vermont A

Exchange-traded funds (ETFS) are bundles of securities, very much like mutual funds; the difference is that they trade like shares on a stock exchange.