Understanding Adjusted Book Value: A Valuation Guide

Adjusted book value is always lower than the intrinsic value of the business.

Book value, in finance, also referred to as stockholders' equity or liquidation value, is calculated by subtracting liabilities from assets. For instance, if a company has assets of $100,000 and liabilities of $20,000, the book value is $80,000. However, there's also a term referred to as adjusted book value which is used by valuation practitioners to determine the value of distressed properties facing liquidation. Adjusted book value considers the fair market value of assets owned by the business as well as any off balance sheet calculations.

Step 1

Obtain the annual report. The annual report is usually listed on the company's website. You can also call Investor or Shareholder Relations to request a hard copy.

Step 2

Turn to the balance sheet. The balance sheet is a summary of company assets and liabilities on a certain date in time. The date is at the top of the balance sheet.

Step 3

Calculate the book value. Subtract assets from liabilities. Assume the assets are $100,000 and the liabilities are $20,000 as described in the introduction. The book value is $100,000 minus $10,000 or $80,000.

Step 4

Determine the fair market value of assets. The book value does not need to be adjusted if calculated on the date in which the balance sheet is created, however, asset values can change on a daily values. Obtain an appraisal for assets or re-evaluate the assets yourself for the value as of today. Add the difference to the book value calculated in Step 3.

Step 5

Compute the adjusted book value. Go to the notes to the balance sheet located just after the financial statements. Specifically, you are looking for the section titled "Off Balance Sheet Items". This section will explain the nature of the assets not on the balance sheet. Add these assets to the book value calculated in Step 3 for the adjusted book value.