Practical Significance of Book Value

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The book value of a common stock was originally the most important element in its financial exhibit. It was supposed to show "the value" of the shares in the same way as a merchant's balance sheet shows him the value of his business. This idea has almost completely disappeared from the financial horizon. The value of a company's assets as carried in its balance sheet has lost practically all its significance.

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This change arose from the fact,

~first, that the value of the fixed assets, as stated,

frequently bore no relationship to the actual cost and,

~secondly that in an even larger proportion of cases

these values bore no relationship to the figure at which they would be sold

or the figure which would be justified by the earnings.

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The practice of inflating the book value of the fixed property is giving way to the opposite artifice of cutting it down to nothing in order to avoid depreciation charges, but both have the same consequence of depriving the book-value figures of any real significance.

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It is a bit strange, like quaint survival from the past, that the leading statistical services still maintain the old procedure of calculating the book value per share of common stock from many, perhaps most, balance sheets that they publish.

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Before we discard completely this time-honored conception of book value, let us ask if it may ever have practical significance for the analyst. In the ordinary case, probably not. But what of the extraordinary or extreme case ?

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