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Book value is an accounting concept that reflects a company's value according to its balance sheet. It's equal to shareholders' equity, which is the difference between assets and liabilities.
But is it a good measure of a company's worth? Book value once approximated a company's market value, when 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.
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Book value can be a poor indicator of fair value for even a heavily industrial company. Imagine a company 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.
Microsoft is a Motley Fool Inside Value recommendation.
Prashant Rathore and Joe Magyer contributed to updating this article, which was originally written by Selena Maranjian. Neither Prashant or Joe owns shares in any of the companies mentioned. The Motley Fool has a disclosure policy.