The notional value of a share (or theoretical book value) refers to the book value that a company should have. To do this, the information necessary to calculate it is extracted from the balance sheet of said company.
How is the theoretical book value of a company calculated?
For its calculation we will have to obtain the difference between the assets and liabilities or obligations of the company. The formula would be this:
VTC = (Active-Passive)
This value tells us how much a company is worth from an accounting point of view, since with this result we have discarded the debts that the company had contracted.
We can also calculate the underlying book value per share. This value tells us how much a business share would be worth in accounting terms. Like the previous value, the VTC per share is calculated by subtracting assets and liabilities and dividing the result by all the shares that a company has issued. We have:
VTCa = (Assets-Liabilities) / No. shares
The theoretical book value, especially the one per share, is really useful if we are thinking of investing in a company. It can be used as a reference when viewing the quotation of the company's shares on the stock market. In this sense, if the theoretical book value is lower than the value of the stock in bag, it is clear that we should not buy this stock (normally, it is said that the company is overvalued or there are high expectations of growth on it). On the contrary, if the VTC is higher than the market value, we should buy that share: we will obtain future benefits.