The tangible book value (TVB) of a corporation determines how much common shareholders may expect to receive if a company goes bankrupt, resulting in the liquidation of its assets at the book value price. Because intangible assets such as goodwill cannot be liquidated during liquidation, they are excluded from calculating tangible book value. Companies with high tangible book values, on the other hand, tend to provide shareholders with more downside protection in the event of bankruptcy.
It is just the worth of an organization's physical assets, such as its buildings and equipment that is considered in calculating tangible book value per share. Once the value of the physical assets has been calculated, the amount is divided by the number of shares of the firm that are currently outstanding to arrive at the net asset value. The sum calculated via this technique is the company's total book value per share (TBVPS). If a business goes bankrupt and is forced to sell all of its assets, the total book value (TVB) estimates how much the firm is worth.
Due to the inability of some inherent features like goodwill or employee expertise to be liquidated for a monetary value, intangible assets are not included in total book value. Physical things that may be handled and sold at a readily ascertainable market value are excluded from TVB use. Using certain online databases and websites, potential investors may track the evolution of a company's total book value per share (TBVPS) over time.
Prerequisites for Tangible Book Value Per Share (TBVPS)
The tangible assets might comprise any actual items that the firm manufactures and any raw materials utilized in the production of those products. Suppose a company is in the business of manufacturing bicycles. The worth of these assets is calculated by the price at which they would be sold if the firm were compelled to liquidate them, which would most often occur in the case of bankruptcy.
Aside from assets related to the manufacture of a product, any equipment used in the manufacture of the product can be included in the valuation of the product. All equipment and machinery necessary to complete the manufacturing process and any real estate owned and utilized for production might be included. Computers and file cabinets, among other items of business equipment, may also be considered physical assets for valuation.
TBVPS Has Come Under Fire
The ratio of shareholder equity to the number of shares outstanding is referred to as a company's book value. All that is taken into consideration is the accounting value, which is not necessarily an accurate indication of the current market worth or the amount collected during a sale.
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When to Rely on Price
Companies engaged in heavy manufacturing or operating in service-oriented industries are exempt from the application of PTBV. Still, enterprises are not engaged in light manufacturing or operating in service-oriented industries. Resulting in a deceivingly high PTBV ratio on the balance sheet.
At the end of 2020, the tangible book value of General Motors was $44.44 billion (total net assets of $235.19 billion minus $5.23 billion, which was a decrease from the previous year's figure of $44.44 billion. There were 1 billion shares outstanding for $1.4 billion, resulting in a tangible book value per share of $31.74. On the final day of 2020, the closing price per share of General Motors was $41.64. As a result, the PTBV was $41.64 divided by $31.74, or 1.31. An analyst may look at the trend of this ratio or compare it to its peer group to see how it is changing.
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