Adjusted book value


Adjusted book value is a type of balance sheet-based business valuation method that aims to give a more realistic valuation than the underlying book value.

The adjusted book value tries to solve one of the problems of the book value (also known as book value). The book value only takes into account the net worth. Or what is the same, the value that according to the balance sheet has the company.

From this starting point, the adjusted book value goes further. And it takes into account extra accounting valuations by the analyst. For example, clients who are declared insolvent. Although this fact, in the short term, may not be reflected in the balance sheet, it would result in a lower asset. And, therefore, a lower book value of the company. Let us remember that:

Book value = Assets - Liabilities

Accounting adjustment

How to Calculate Adjusted Book Value

There is no exact formula when calculating the adjusted book value. According to the analyst and according to the company, it will be calculated in one way or another. Despite this, we can provide a general formula as follows:

Adjusted Book Value = Adjusted Assets - Adjusted Liabilities

Where "adjusted" means that they are the values ​​of the assets and liabilities that the analyst believes they really have, and not the value that appears on the balance sheet.

For example, if the analyst estimates that the value of the debts (liabilities) is lower than that reflected in the balance sheet, he will give a lower value than the liability. Consequently, the company will have more value to the analyst.

Adjusted Book Value Calculation Example

To see the above more clearly, we are going to look at the case of a real balance. In the actual balance there are data on assets, liabilities and net worth. According to the theoretical book value, the value of the company would be what the green box indicates:

Whether we look directly at the green box, or if we subtract total assets (406,794,000) from total liabilities (266,595), the book value has the same value and is $ 140,199,000.

Now, as analysts we analyze the company. And when we analyze the company in more detail, we look at more information and more documents apart from the balance sheet (such as the annual accounts). And we get the following (the games marked with the red box are the ones that we value differently):

  • Short-term investments: The company speculates in shares of other companies. Much of these stocks have fallen quite a bit and are now worth less. Therefore, the value of Short-term investments it becomes $ 49,662,000 to $ 40,000,000.
  • Net outstanding accounts: One of the company's clients becomes insolvent. That is, the company will stop collecting an outstanding invoice for $ 1,000,000. The value of the net outstanding accounts goes from 50,899,000 to 49,899,000 dollars.
  • Intangible assets: According to our analysis, one of the company's patents will be revalued. The patent is for security systems for bank accounts. Now many banks are interested in that system. The intangible asset goes from 2,149,000 to 5,350,000 dollars.

After these adjustments and after carrying out the corresponding operations, the total assets go from worth 406,794,000 to worth 399,333,000. Finally, according to our analysis, the value of the liability does not have significant changes. Therefore, the adjusted book value is:

Adjusted book value = Adjusted assets - Adjusted liabilities = 399,333,000 - 266,595,000 = 132,738,000

The adjusted book value (132,738,000) is less than the theoretical book value (140,199,000) after making the adjustments that, as expert analysts, we have deemed appropriate.

Fair value

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