Book Value of a company vs. Enterprise Value of a company

"DarkProtoman" wrote

You can't use book value to gauge market value, although book values are a starting point.

Except for cash, not really.

Most all business appraisers use a multitude of valuations methods and combine them.

Thre are several rules of thumb, but to get a firm number that you can defend, use a licensed business appraiser.

Very simplified...

Book value is assets minus liabilities.

Enterprise value is market-cap plus debt, minus cash.

Suppose I start a business by getting a business license, renting an office, and buying a desk.

Assets: one desk, $300. Liabilities: none (let's assume anyway; rental might be a liability) Book value: $300 Enterprise value: $0

Now I somehow, by some miracle, convince the bank to loan me one billion dollars:

Assets: one desk, $300; $1B cash, $1B. Liabilities: $1B (to bank). Book value: still $300 Enterprise value: still $0

... which I then use to buy the Zorglobnian Dollar in a bet that it will rise against the US$. The next day the revolutionaries overthrow the rulers of Zorglob and declare the currency invalid, wiping out all my Zorglobnian assets.

Assets: one desk, $300 Liabilities: $1B Book value: $-999,999,700 Enterprise value: $1B

See above.

Which is a more meaningful measure of the climate of some location: the temperature right now, or the wind speed right now?

"Book value" tells what the pieces are worth. "Enterprise value" tells how much it costs to buy the company whole. Neither one is a particularly great measure since both are statics snapshots; neither one captures anywhere near everything you need to know.