Book Value
What Is Book Value?
Book value is the net value of a company’s assets after subtracting its liabilities. It represents the accounting value of the company based on its balance sheet.
When expressed on a per-share basis, book value can help investors compare the company’s underlying net asset value to its stock price.
Why It Matters
Book value helps investors evaluate whether a company may be undervalued or overvalued relative to its net assets. It is especially useful when analyzing asset-heavy businesses such as banks, insurers, and industrial companies.
Book value is also commonly used in value investing and ratio analysis.
How Book Value Works
Book value is calculated using:
Total Assets − Total Liabilities = Book Value
Investors may divide this figure by the number of shares outstanding to calculate book value per share.
This number can then be compared with market price using the price-to-book ratio (P/B ratio).
Example
If a company has $500 million in assets and $300 million in liabilities, its book value is $200 million. If the company has 20 million shares outstanding, the book value per share is $10.
Book Value vs Market Value
- Book value reflects accounting-based net asset value.
- Market value reflects the current price investors assign to the company in the marketplace.
FAQs About Book Value
Is book value the same as stock price?
No. Book value comes from financial statements, while stock price reflects market demand.
Why do value investors use book value?
It helps them compare market price to underlying net assets.
Is book value useful for all companies?
It can be less useful for companies whose value depends heavily on intangible assets or future growth.
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