Guide to Analysing Companies

2 The book value of a company’s various classes of securities.
(See also next entry.)
Net book value
The difference between the cost of an asset and its accumu-
lated depreciation. The main purpose of depreciating an
asset is to recover the cost of its purchase. So the book value of
an asset may vary markedly from its market value. The former
is usually calculated by taking the total value of all assets, less
the value of any intangible assets (such as goodwill and
patents), less all liabilities (such as bank debt), less the value
of securities with a prior claim (preferred stock), and dividing
by the number of securities of that class in issue at the time.
Net present value
An estimation of the value today of a payment to be made (or
received) tomorrow. The payment is discounted by an amount
that takes into account the time between now and the day that
the payment is due. This amount is calculated taking into
account the expected level of interest rates and the degree of
risk involved in the payment. The net present value of an in-
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vestment project is the difference between the present value of
the future revenue from the project, and the present value of
the future costs.
Netting
A contract between banks or other financial institutions to
offset their mutual obligations at their net value. For example,
if two banks owe each other $15m and $18m respectively, they
might agree to value the mutual obligation at $3m, the net dif-
ference between the two. There are various ways of netting: bi-
laterally (the simplest); by involving a third party; or by
novation, which is when a new agreement replaces the existing
one. The increasing complexity of financial markets and the
speed with which transactions take place has made netting an
attractive proposition to many investors, particularly if they
deal with each other regularly.