Pros and cons of book value
Pros of book value
Using the book value calculation can show how much a business or asset is worth based on data, rather than on speculation or opinion. Therefore, it is considered a relatively accurate measure of value. This means it can be useful when trying to learn more about a company or find stocks at a fair price.
Cons of book value
Book value alone is not a definitive measure of value. This is because book value is ineffective at valuing intangible assets, such as intellectual property rights. For example, companies that develop software might be able to develop products for a relatively low cost, so the balance sheet might not reflect the true value of the assets. This could mean that the company’s shares trade at many times their book value but should not be considered overvalued.
Book value should therefore be used as a comparative measure (to compare assets and companies with one another).