Allen Peyton

What a smart, "bookish" question -- one that many of investors probably want to ask but are afraid to. But because you spoke up, you get a reward -- a valuable book -- "How to Invest $50 to $5,000."

BOOK VALUE

The simplest definition of book value is the dollar value at which an asset is carried on a company's balance sheet -- the original cost minus its accumulated depreciation. For example, if the company purchased a building for $1 million that over the years has depreciated by $200,000, it has a book value of $800,000. Book value obviously can vary widely from market value. (An accounting textbook will give you a more in-depth definition.)

BOOK VALUE PER SHARE

In security analysis, we often see the phrase "book value per share." It reflects the common stockholders' equity in a company on a per share basis. In other words, it's what investors would get in the unlikely event that the company sold all its assets, paid its debts, took care of its preferred stockholders and went out of business.

The most basic formula for arriving at book value per share is to subtract the company's liabilities from its assets and then divide by the number of shares outstanding.

So, if all assets were liquidated at the dollar value stated on the company's books and all liabilities (accounts payable, taxes due, long-term debt) were paid and then all preferred stockholders compensated, what's left for common stockholders would be the book value.

USING BOOK VALUE IN PICKING STOCKS

A company's book value can be useful in evaluating a stock, but as you'll see, it is not a foolproof investment tool. Several points to consider:

(1) RULE OF THUMB: When a company has solid earnings, its stock tends to sell above its book value. When a company is in trouble, however, and has little or no current earnings, it tends to sell below book value. There are, of course, exceptions to this rule of thumb. Read on...

(2) Some analysts suggest looking for companies selling below book value, believing that this situation enables one to buy the company's assets at a favorable price. This is often true, but book value alone is not reason enough to buy a stock. You need to find out why a stock is selling below book value -- it may indicate that the company's assets, such as its machinery or plants, are obsolete or cannot be fully utilized, or that it's carrying too much long-term debt.

(3) If low book value is due to too much debt, then even if a company has a substantial business, it may be risky, at least in the short term. That's not to say you should shun the stock, but be aware it may not be a conservative choice.

(4) On the other hand, low book value could indicate that the company will appear attractive to a potential acquirer. Analysts, in fact, use book value as a way to identify takeover targets and as an index against which to evaluate a merger offer. (Generally, an acquiring company must pay a premium over book value.)

(5) And finally, if low book value is due to the fact that assets are undervalued (property purchased years ago is now worth much more, for instance), and the company's business is otherwise solid and growing, this may indeed be a good buying opportunity

$TIP: One of the best places to compare a company's book value with its long-term debt and at the same time get a professional evaluation of the stock is "Value Line Investment Survey" (www.valueline.com).