Tangible Book Value
Intangible assets and goodwill are excluded from the calculation of tangible book value, commonly referred to as net tangible equity. To put it another way, it is the total value of a company's tangible assets. Because they are intangible assets that are more difficult to sell than property, plant, and equipment, such as intellectual property, patents, and trademarks, the TBV excludes a company's intellectual property, trademarks, and patents.
The tangible book value (TBV), which excludes intangible assets, calculates the value of a company's tangible assets.
- Tangible Assets: Physical Assets (e.g. Cash, Inventory, PP&E)
- Intangible Assets: Non-Physical Assets (e.g. Intellectual Property, Copyright, Patents, Trademarks, Goodwill)
The concept of tangible book value (TBV) is the post-liquidation residual net value of a firm that belongs to common shareholders, or the value that remains after all existing liabilities, such as debt, are paid back.
Because they cannot be disposed of through liquidation and sale, intangible assets are not included in the computation of tangible book value.
The tangible book value (TBV) is determined using the following formula.
Tangible Book Value = (Total Assets – Intangible Assets) – Total Liabilities
The worth of a company's physical assets is determined by the first component of the equation, which is total assets less intangible assets.
Because claims like debt and accounts payable have a higher priority and must be satisfied before any proceeds can be given to common equity owners, the value of all outstanding obligations is then subtracted from the value of the company's physical assets.
The investor analyst can determine the company's capacity to offer investors a respectable return on their investment by using return on investment metrics. Often, this is evaluated by looking at indicators like net worth, returns on equity or assets, earnings, economic value contributed, and dividends. Metrics for return on investment give analysts a means to estimate what a share of common stock should be valued at. Measuring a company's tangible book value is one method of determining return on investment.
Calculating the company's tangible book value can help an investor-analyst comprehend how much money is left over after all of the obligations have been subtracted from the assets. Liabilities are deducted from assets, just like in net value. Nevertheless, the more thorough measure of tangible book value eliminates goodwill and other intangible assets from net worth. Goodwill, by definition, is the value that a corporation pays over market value. Because of this, tangible book value is thought to be a better representation of the amount of money that would be available for distribution to holders of common stock in the case of liquidation.