Book value is an accounting concept, reflecting a company's value according to its balance sheet. It's equal to shareholders' equity, or the difference between assets and liabilities.

Book value once approximated a company's market value, as most assets, such as factories and land, were capital-intensive and appeared on the balance sheet. Today, however, as America's economy has become less industrial and more service-oriented, book value is a less-relevant measure for investors.

Consider Microsoft (NASDAQ:MSFT), for example. Its recently reported book value was about $70 billion. This is far from a fair value for the company, as Microsoft's market value is around $300 billion, and it has more than $55 billion in cash and cash equivalents alone. Much of Microsoft's value stems from assets that don't register significantly on the balance sheet: intellectual property, talented employees, strong brand, and phenomenal market share. Also critical is its competitive position and future growth prospects. (Note that Microsoft recently announced big plans for spending much of its cash cache -- learn more from this Rick Munarriz article.)

Book value can even be a poor indicator of fair value for a heavily industrial company. Imagine a firm that owns a lot of land and many buildings. Over the years, the value of these assets is depreciated on the balance sheet, eventually to zero. But these assets are rarely worthless and can even appreciate in value over time. Such a company might actually be worth a lot more than its book value (while other companies can be worth much less). For these reasons, it often makes sense to largely ignore book value.

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