There are many important bits and part of valuation when you study the company. All of them check weather it is possible for the company to make money in Future and if yes, then how much is the Risk attached with it. What market is paying them? What is a capital structure and how much part of earnings are there with shareholders.
One Ratio which is very important in valuation of Assets is Book value.
The Ratio is important for the reason that it is showing you in the event of solvency, what is your claim on Assets.
In simple words the Ratio is telling you that if company sold all of Their Assets, repay all debts if any. Then how much amount will remain with common shareholders. Some Time it is very conservative number as how the company use Goodwill for payment of Debt? It simply can’t. Another Issue is with out of Balance Sheet assets. Best example is Tata motors. The company holds two Manufacturing plants which are not part of Balance Sheet. They are fully depreciated. But of the company say decide to shutdown (though it will not happen) there is some value for that plays or atleast the land.
The single Ratio will not tell you anything. But if you analyse whole industry then you may find it useful. It is also helpful in timeframe like what happened in 5 year or 10 years.
In some industries it is extremely useful. Best example is Finance Company, investment companies, Banks, upto certain limit Infrastructure and power company also. The reason is all of them need big Capital continuously. Most of the time it is borrowed funds. so if the whole company is shutting down Tomorrow, weather I am making anything? Is important question to ask here. MANY times it looks like that company is making Profit but Book value is not going up. That time it is must to ask the management that what is happening?
This Ratio is also important that it is the amount which the company makes from its incorporation till date after paying everything.
Though it is an accounting number but still it is helpful for investors in many ways.
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