What Is an Adjusted Book Value?

Adjusted book value (ABV) is the true worth of a company after all assets and liabilities are evaluated. Generally, this assessment includes things such as investment potential, brand recognition, and product research and development advances. As such, the financial picture given by ABV is generally a more reliable gauge of true market value than simple profit-versus-loss comparisons. This value is frequently used when pricing market shares, determining a distressed organization's viability, and during strategic planning analysis.

In general, there are two types of adjusted book value. The first type, tangible book value, is a simple computation of the assets of a company versus its liability. All marketable property of an organization, including real estate and inventory, are assessed at fair market value to give the worth of an organization. Liabilities, such as loans and other debts, are subtracted from the worth to give a concrete dollar value.

Conversely, a specialized assessment of adjusted book value, called economic book value, includes factors that cannot be given a concrete value but are, nonetheless, vital in understanding the true worth of an organization. Often, reputation and customer satisfaction are vital in determining the prices of market shares. Organizations with high ratings in these areas are more likely to recover from financial distress than companies that are lacking.

In due diligence audits preceding the buyout of an organization, both types of adjusted book value are investigated. In many instances, an organization with a low tangible book value and high economic value is seen as an excellent potential investment. Generally, these companies can be purchased for a price far lower than their true market values.

Likewise, businesses in financial distress often use adjusted book value to determine the viability of turnaround management measures. A successful candidate for business revitalization often has a very high economic book value even if the tangible value is wanting. For distressed organizations with poor reputations or marketability, liquidation is often the result.

It should be noted that, while intangible assets are extremely important to an organization, they usually have no value in legal matters. In general, only the physical assets of a company are considered during bankruptcy and liquidation proceedings. As such, judgments are frequently made that are financially incongruent to the true market value of a distressed organization.

An organization's adjusted book value also plays a large part in its success in the stock market. Successful amateur investors, without realizing it, are often very astute at judging the economic book value of an organization. These types of investors, however, are more likely to overestimate the financial impact of negative publicity toward any given business.