Book value and intrinsic value are two ways of measuring the value of the company. There are a number of differences between them, but, in fact, the carrying value is a measure, while intrinsic value in the budget accounts in the future.
What Is Carrying Value?
The carrying value is determined on the basis of the value of total assets less value of liabilities — it attempts to measure the net assets built up to date. In theory, this is the amount that shareholders might receive if the company will be completely liquidated.
For example, if a company has $23.2 billion in assets and $19.3 billion in liabilities, the carrying value of the company would be the difference, $ 3.9 billion. To Express this number in terms of a book value stock, just take the book value and divide it by the number of shares issued. If currently the company is trading below its book value, it is often considered undervalued.
There are, however, several problems with using book value as a measure of value. For example, it would be unlikely that the value of the company will receive in case of liquidation will be equal to the book value per share. However, it can still be used as a useful benchmark to assess how profitable the company’s shares may fall if the market turns sour on it.
What Is The Intrinsic Value?
Intrinsic value is a measure of the value depending on future earnings, the company is expected to generate for its investors — it attempts to measure the value of the net assets of the company, planned to build in the future. She is the true value of the company from the point of view of investment and is calculated based on the present value of earnings (attributable to investors) that a company needs to produce in the future, along with the future sale value of the enterprise.
The idea of this measure is that the purchase of shares entitles the owner to receive its share in the future profits of the Company. If all future earnings are known with certainty, along with the final sales price, the true value of the company can be calculated.
For example, if we assume that the company will be around for one year, and creating $ 1,000 before being sold for $10,000, we can find the intrinsic value of the company. At the end of the year, we received $11,000. If our required return is 10%, today is the present value of the future earnings and sale price is $10,000. If we had to pay more than $10,000 for our company, the required return is achieved.
(To learn more, check out the value on the book and a guide to stock picking strategies.)