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Book Value vs. Salvage Value: An Overview
Book value and salvage value are two different measures of value that have important differences. Book value attempts to approximate the fair market value of a company, while salvage value is an accounting tool used to estimate depreciation amounts of tangible assets and to arrive at deductions for tax purposes.
Key Takeaways
- When valuing a company, there are several useful ways to estimate the worth of its actual assets.
- Book value refers to a company’s net proceeds to shareholders if all of its assets were sold at market value.
- Salvage value is the value of assets sold after accounting for depreciation over its useful life.
Book Value
Book value (also known as net book value) is the total estimated value that would be received by shareholders in a company if it were to be sold or liquidated at a given moment in time. It calculates total company assets minus intangible assets and liabilities. Book value is a metric that helps analysts and investors evaluate whether a stock is overpriced or underpriced when compared to the company’s actual fair market value, an estimate of the price for which the company could be sold. Net book value can be very helpful in evaluating a company’s profits or losses over a given time period.
Salvage Value
Salvage value is a tool used in accounting to estimate the value that a tangible asset can be sold for when it has reached the end of its useful life—in short, what the asset can be salvaged for when a company can no longer make viable use of it. The salvage value is used to determine annual depreciation in the accounting records, and the salvage value is used to calculate depreciation expense on the tax return.
Salvage value can sometimes be merely a best-guess estimate, or it may be specifically determined by a tax or regulatory agency, such as the Internal Revenue Service (IRS). The salvage value is used to calculate year-to-year depreciation amounts on tangible assets and the corresponding tax deductions that a company is allowed to take for the depreciation of such assets.
Special Considerations: Liquidation Value
A third consideration when valuing a firm’s assets is the liquidation value. Liquidation value is the total worth of a company’s physical assets if it were to go out of business and the assets sold. The liquidation value is the value of a company’s real estate, fixtures, equipment, and inventory. Intangible assets are excluded from a company’s liquidation value.
Liquidation value is usually lower than book value but greater than salvage value. The assets continue to have value, but they are sold at a loss because they must be sold quickly.
Liquidation value does not include intangible assets such as a company’s intellectual property, goodwill, and brand recognition. However, if a company is sold rather than liquidated, both the liquidation value and intangible assets determine the company’s going-concern value. Value investors look at the difference between a company’s market capitalization and its going-concern value to determine whether the company’s stock is currently a good buy.