Chartered Financial Analyst (CFA) Practice Exam Level 2

What is a key advantage of using Book Value (BV) in financial analysis?

1. It measures the market value of a company

2. It is guaranteed to equal market value

3. It is more stable than Earnings Per Share (EPS)

4. It's less influenced by accounting choices

The correct answer is: It is more stable than Earnings Per Share (EPS)

A key advantage of using Book Value (BV) in financial analysis is that it is typically more stable than Earnings Per Share (EPS). Book Value represents the net asset value of a company, calculated as total assets minus total liabilities. This measure is less susceptible to fluctuations caused by varying market conditions, temporary operational performance, or accounting decisions that can significantly affect EPS. Earnings Per Share can be quite volatile as it is influenced heavily by factors such as one-time gains, expenses, and different accounting practices regarding revenue and expense recognition. In contrast, Book Value, being a balance sheet measure, usually reflects a more consistent portrayal of a company's net worth over time, as it does not change as dramatically with short-term financial performance issues. This stability makes BV a reliable metric for assessing a company's underlying financial strength, especially for value investing or comparing companies in the same industry. Utilizing BV in analysis provides investors with a level of assurance regarding the company's fundamental financial health that EPS may not consistently offer, especially during times of market turbulence or when a firm experiences unusual activities affecting its income.