Adjusted book value

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

From this starting point, the adjusted book value goes further. And it takes into account extra accounting valuations by the analyst. For example, customers who declare insolvency. Although this fact, in the short term, may not be reflected in the balance sheet, it would result in lower assets. And, therefore, a lower accounting value of the company. Remember that:

Book value = Assets – Liabilities

How to calculate the adjusted book value

When calculating the adjusted book value there is no exact formula. 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 asset – adjusted liability

Where “adjusted” means that they are the asset and liability values ​​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 less than that reflected in the balance sheet, it will give a lower value to the liabilities. Consequently, the company will have more value for the analyst.

Example of calculating the adjusted book value

To see the above more clearly, we will look at the case of a real balance. In the real balance sheet there are data on assets, liabilities and net worth. According to the 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 value of the book value has the same value and is $ 140,199,000.

Now, as analysts we analyze the company. And when analyzing 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 items marked with the red box are the ones we value differently):

  • Short-term investments:The company speculates with  shares of other companies. Much of these shares have fallen quite a bit and are now worth less. Therefore, the value of short-term investments becomes from $ 49,662,000 to $ 40,000,000.
  • Net outstanding accounts:One of the company’s clients declares insolvency. In other words, the company will stop collecting a pending invoice worth $ 1,000,000. The value of net outstanding accounts goes from $ 50,899,000 to $ 49,899,000.
  • Intangible assets:According to our analysis, one of the company’s patents will be revalued. The patent is for security systems for bank accounts. Many banks are now interested in that system. Intangible assets go from 2,149,000 to $ 5,350,000.

After these adjustments and after carrying out the corresponding operations, the total assets go from being worth 406,794,000 to being 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 book value (140,199,000) after making the adjustments that, as expert analysts, we have deemed appropriate.


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