Well, if you are a person who is always baffled by identical terms like Face Value and Book value, don’t worry, here, in this article let’s figure out their specific meaning, their pivotal role, and their differences. You cannot make a standard opinion about investing in stocks without understanding these financial terms and their metrics and value in the market.
Many investors especially, new ones, are often confused with these crucial terms associated with financial endeavors. I will guide you to know the significance and differences between Face Value and Book Value. Let’s delve into Face Value vs Book Value.
What is Face Value?
Face value is also regarded as Par Value. It is the original value of financial instruments like bonds, and stocks which is stated by the issuing company. Face value is a permanent value that remains constant and doesn’t fluctuate with the market.
To understand it in a better way, Face value is like the price sticker on a material like a bike, sofa, or anything else. This value is decided by the company. Face value plays a significant role in determining the maturity amount of any nominal value of the share. It is employed as a reference point for analyzing entries and legal matters related to financial instruments.
Face Value is calculated using two important numbers:
- Equity share capital
- Number of shares outstanding
Face Value = Equity shares capital / Number of shares outstanding
Face value is also considered as the dollar value of security since a stock’s face value is the dollar figure. Suppose, if you hold a bond with a face value of $2,000, the bond will mature and can be redeemed at this amount. Face value remains fixed throughout the life of the security and is primarily used for accounting purposes.
What is Book Value?
Book value is also known as Net Asset Value (NAV). It is the value of the company’s net worth or equity. It is measured by a calculation, that is, total assets in liquidation minus total liabilities from assets.
Book Value = Total Assets – (Total Liabilities – Current Liabilities)
Subtly, Book value is like the secret price of a material that can be decoded only by a private financial investigator. It can assist you in figuring out whether the stock is dynamic or overpriced based on its financial statements. It will make you clear about a company’s financial wealth.
Book value plays a significant role in providing insight into how assets are distributed in the business. Fluctuation in Book Value is infrequent and changes annually, as per business performance.
Difference Between Face Value and Book Value
The main difference between “face value” and “book value” is what they represent and how they are used.
“Face value” is the original cost of a financial instrument, like stocks or bonds, as stated by the company when it is first issued. This value does not change over time. For example, if a bond is issued at a face value of ₹1000, this value stays the same, no matter what happens in the market.
On the other hand, “book value” is the value of an asset as it appears in a company’s accounting records. It is calculated by taking the cost of an asset and subtracting any depreciation, amortization, or impairments. Unlike face value, book value can change over time. It gives us an idea of what the company’s assets are worth right now, after accounting for any wear, tear, or age.
In simple terms, face value is the original price or cost set by the issuer, which stays the same. Book value is about what a company’s assets are worth now, considering how their value has changed over time.
| Face Value | Book Value |
|---|---|
| The Face Value is more of a legal formality and doesn’t designate the current market valuation of the stock. | The Book Value can be deciphered by accounting practices and may not always reflect the company’s market value. |
| The Face Value of a company’s share always remains constant since it is the initial value assigned to the shares by the company. | The Book Value includes the amount of reverse per share that a company accumulates over time. It increases the company’s profit and adds them to its reserve. |
| Face value is calculated by,Face Value = Equity shares capital / Number of shares outstanding | Book value can be calculated by, Book Value = Total Assets – (Total Liabilities – Current Liabilities) |
Bottom Line
In conclusion, understanding the difference between Face Value and Book Value is crucial and essential for anyone who wants to navigate and make a good investment decision.
Considering these values as part of a broader analysis that offers insights into valuation aspects including financial metrics and market conditions is important. By teaching these concepts you can make a proper decision that aids you with your financial goals and risk appetite.