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The book value of an asset or group of assets is the price at which they were originally acquired, in many cases equal to purchase price. The term is often used interchangeably with net book value, which is the original acquisition cost, less accumulated depreciation, depletion or amortization. Book value is therefore relevant insofar as it forms the basis of various calculations e.g. of nominal capital gains (current value divided by book value), of amortized value (book value adjusted for depreciation) and of several financial ratios (e.g. price to book value P/BV). Book value of an asset can be very different from the current price e. g the market price. Book values can thus be misleading because for many purposes, e.g. individual investment decisions and business decisions in going concerns, historic cost and/or book value can be irrelevant to the decisions being made. That is, decisions should be based on current (replacement) costs and expected future developments.
Book value of a firm -- that is the total of the net book value of all of the firm's assets -- is generally lower than the market capitalization of a firm, because the value assigned by the market is generally understood to be based on the discounted value of future earnings and takes account of factors such as the productive capacity of the assets, the expertise of employees and the value of brands. In non-asset-intensive industries (such as high-technology or service industries), book value is generally much lower than market capitalization.
- See also: Mark to market, List of finance topics.
