Book value tells you what a company is worth according to its balance sheet. It is the accounting value of a company if you subtracted all debts from all assets. Understanding book value helps you assess whether a stock might be undervalued or overvalued.
What is Book Value?
Book value is the net asset value of a company based on its accounting records. It represents what shareholders would theoretically receive if the company liquidated all assets and paid off all debts.
Book Value = Total Assets - Total Liabilities
If a company has $500 million in assets and $200 million in liabilities, book value is $300 million.
Book value is also called shareholders' equity or net asset value. You can find it on the balance sheet in a company's financial statements.
Book Value Per Share
To compare book value across companies, we calculate book value per share (BVPS):
BVPS = Book Value / Shares Outstanding
If book value is $300 million and there are 100 million shares, BVPS = $3.00
Book value per share tells you the accounting value of each share. You can compare this to the stock price to see if the market values the company above or below its book value.
Book Value Example
Company ABC has:
- Total assets: $10 billion
- Total liabilities: $6 billion
- Shares outstanding: 500 million
Book value = $10B - $6B = $4 billion
BVPS = $4B / 500M = $8.00 per share
If the stock trades at $12, it trades at 1.5x book value.
Price-to-Book (P/B) Ratio
The price-to-book ratio compares a stock's market price to its book value:
P/B Ratio = Stock Price / Book Value Per Share
A stock at $15 with BVPS of $10 has a P/B ratio of 1.5
Interpreting P/B ratio:
- P/B below 1: Stock trades below book value. Could be undervalued or could have problems.
- P/B of 1: Stock trades at exactly book value.
- P/B above 1: Stock trades above book value. Market values intangibles, growth potential, or brand.
Tangible Book Value
Tangible book value is a more conservative measure that excludes intangible assets:
Tangible Book Value = Book Value - Intangible Assets - Goodwill
Intangible assets include things like patents, trademarks, and goodwill (the premium paid in acquisitions). These can be hard to value and may not have real liquidation value, so some investors prefer tangible book value.
Tangible book value is especially important for banks and financial companies, where it is a key metric regulators and investors watch.
When Book Value Matters Most
Book value is more useful for some industries than others:
High relevance:
- Banks and financials: Their assets (loans, securities) have clear book values
- Insurance companies: Investment portfolios have definite values
- REITs: Real estate values are fundamental to the business
- Asset-heavy industrials: Factories and equipment have real value
Lower relevance:
- Technology companies: Value comes from intellectual property and future growth
- Service businesses: Few physical assets; value is in people and relationships
- Brands: Coca-Cola's brand is worth billions but barely shows on the balance sheet
Industry Comparison
JPMorgan (bank): P/B around 1.5-2.0 - book value highly relevant
Apple (tech): P/B around 40+ - book value less relevant, value is in brand and ecosystem
Google (tech): P/B around 6-7 - moderate relevance, has significant cash and assets
Limitations of Book Value
Book value has significant limitations:
Historical cost accounting
Assets are recorded at what the company paid, not current market value. A building bought 30 years ago for $1 million might be worth $10 million today, but it shows at depreciated historical cost.
Ignores intangibles
Brand value, customer relationships, proprietary technology, and human capital do not show up in book value but can be a company's most valuable assets.
Can be manipulated
Accounting choices affect book value. Asset impairments, depreciation methods, and write-offs all impact the number.
Liquidation rarely happens at book value
In a real liquidation, assets often sell for less than book value (fire sale prices), making book value an optimistic floor.
Book Value and Value Investing
Book value is a cornerstone of value investing, the strategy pioneered by Benjamin Graham and practiced by Warren Buffett.
Graham's approach
Benjamin Graham looked for stocks trading below their net current asset value (current assets minus all liabilities). These "net-nets" were extreme bargains, though rare today.
Modern value investing
Today, value investors use P/B alongside other metrics. A low P/B might indicate:
- An undervalued opportunity if the company is healthy
- A value trap if the company has serious problems
Always investigate why a stock trades below book value before buying.
Book Value vs. Market Value
Understanding the difference between book value and market value is crucial:
Book value
- Based on accounting records
- Historical cost of assets minus liabilities
- Changes slowly
- Does not reflect intangibles well
Market value (market cap)
- Based on stock price x shares
- Reflects investor expectations of future profits
- Changes constantly
- Includes value of brand, growth, and intangibles
For most successful companies, market value exceeds book value significantly because investors value future earnings potential, not just current assets.
How to Use Book Value in Analysis
Here is a practical framework:
- Calculate P/B ratio: Is the stock expensive or cheap relative to book value?
- Compare to peers: How does the P/B compare to similar companies?
- Look at trends: Is book value growing or shrinking over time?
- Consider the industry: Is book value relevant for this type of business?
- Check tangible book value: For financials and asset-heavy companies, look at tangible book value too
- Use alongside other metrics: Book value is one piece of the puzzle, not the whole picture
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Summary
Book value represents a company's net worth according to its balance sheet: assets minus liabilities. The price-to-book ratio compares stock price to book value and can help identify potentially undervalued stocks. Book value is most useful for asset-heavy industries like banks and real estate, but less relevant for technology and service companies where intangible assets drive value.
Want to learn more? Read our guide on P/E ratio or learn about market capitalization.