Theoretical Book Value (VTC)

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The theoretical book value of a share is the book value that a company should have and whose information is taken from the balance sheet of a company.

It is also known as book value and is calculated as the difference between the assets that a company has and its liabilities or payment obligations. divided by the number of shares issued by it.

The theoretical book value tells us what a company is worth in accounting, since it is calculated by adding all its possessions or assets (buildings, machinery, etc.) of the company and subtracting the debts.

We must emphasize that, on many occasions, the book value of a share tends to be confused with the nominal value, however, it is not the same. The nominal value is obtained through the quotient between the capital stock and the number of shares issued by the company.

Notional book value per share

The theoretical book value per share is very useful to know how much the share of a company is worth accounting. It is calculated as the difference between the assets that a company has and its liabilities or payment obligations, divided by the number of shares issued by it.

Therefore, the formula for calculating the theoretical book value (VTC) is as follows:

The difference between the assets of a company and its liabilities is known as net worth, so the Net Asset Value of the shares of a company can be calculated as:

The theoretical book value is widely used by investors, since it allows us to know the value that according to the accounting of a company a share should have. If the theoretical book value is higher than the value at which the share is traded on the stock market, we will have to buy that share. If, on the other hand, the theoretical book value is lower than the market value, we will say that the company is overvalued or the market considers that there are high expectations for growth.

Calculation of the underlying book value

Let us suppose that a recently created company starts its activity and subscribes a share capital of 10,000 euros by issuing 1000 shares. In addition, it has reserves of 5,000 euros and owns a building worth 20,000 euros.

In this way, we have the following:

Assets = 15,000 euros (Building owned)

Liabilities = 10,000 euros (Share Capital) + 5,000 euros (Reserves) = 15,000 euros

N ° issued shares = 1000

Applying the VTC formula we obtain:

Therefore, the theoretical book value of each share of the company is 15 euros.

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