Book Value

What is Book Value?

Book value is a company’s net worth as recorded on its balance sheet, calculated by subtracting total liabilities from total assets. Book value represents the accounting value of a business based on historical costs and appears on a company’s balance sheet as total shareholder equity.

Investors compare book value to market capitalization to assess whether shares trade at a premium or discount to accounting value. The balance sheet incorporates asset depreciation when calculating book value. Book value is typically expressed per share by dividing total shareholder equity by common shares outstanding.

Book Value Formula

The book value formula is:

Book Value = Total Assets – Total Liabilities

Where:

• Total Assets = Current Assets + Non-Current Assets
• Total Liabilities = Current Liabilities + Non-Current Liabilities

For example, a company with $500 million in total assets and $200 million in total liabilities has a book value of $300 million. This $300 million represents the company’s book value according to its balance sheet.

Book Value Per Share (BVPS)

Book value per share measures the accounting value of a company on a per-share basis. Investors use book value per share to assess whether individual shares trade above or below their proportional claim on the company’s net assets. Book value per share is calculated by dividing total shareholder equity by the number of common shares outstanding.

Book Value Per Share Formula

Book Value Per Share = (Total Assets – Total Liabilities – Preferred Stock) / Common Shares Outstanding

The formula subtracts preferred stock from shareholder equity because preferred shareholders have priority claims over common shareholders. Common shareholders only have claim to assets after all liabilities and preferred stock obligations are satisfied. This adjustment provides a more accurate measure of value available to common stockholders.

Example

Suppose a company you’re analyzing has $800 million in total assets, $300 million in total liabilities, $50 million in preferred stock, and 100 million common shares outstanding. You perform the following calculation.

Book Value Per Share = ($800M – $300M – $50M) ÷ 100M shares = $4.50 per share. 

Each common share represents $4.50 of the company’s net asset value.

Book value per share is particularly useful when comparing individual stock prices to underlying asset values. If the stock trades at $3.00 per share and BVPS is $4.50, the stock trades at 67% of book value. A higher book value per share might indicate the stock is trading at a discount.

What Changes Book Value?

Book value changes as companies earn profits, experience losses, raise capital, or return cash to shareholders. Understanding these drivers helps investors interpret book value trends and assess management’s effectiveness at building shareholder value.

• Retained earnings increase book value. When a company generates net income and retains earnings rather than paying dividends, shareholder equity increases proportionally.
• Net losses decrease book value. Operating losses reduce shareholder equity. Multiple consecutive years of losses can erode book value significantly and may result in negative book value.
• Asset write-downs decrease book value. When companies write down asset values due to impairment or obsolescence, book value declines by the same amount.
• Share buybacks affect book value per share. Stock repurchases reduce shares outstanding, typically increasing book value per share even though total book value decreases.
• New equity issuance increases book value. When companies raise capital by issuing shares, the cash received increases total assets and book value.
• Depreciation gradually reduces book value. As companies depreciate physical assets over time, the book value of those assets and the total book value declines.

Investors should monitor changes in book value alongside operational performance. Book value growth driven by retained earnings signals value creation, while declines may signal challenges.

Why Book Value Matters to Investors

Book value represents a fair and accurate picture of a company’s accounting value. Since book value is determined using actual company data, it’s considered an objective measure of value. 

Book value is particularly important for investors using a value investing strategy. Value investors use book value to find bargain deals on stocks, especially when they suspect a company is undervalued or poised to grow.

Stocks that trade below book value are often considered undervalued opportunities. These stocks are anticipated to turn around and trade higher. Investors who purchase stocks while prices are low relative to book value can potentially make substantial profits if market prices adjust upward.

How to Use Book Value: Price-to-Book (P/B) Ratio

The price-to-book (P/B) ratio compares a company’s market value to its book value. Investors use the P/B ratio to identify potentially undervalued or overvalued stocks. The price-to-book ratio is calculated by dividing the current market price per share by the book value per share:

Price-to-Book Ratio = Market Price per Share / Book Value per Share

A P/B ratio below 1.0 means the stock trades below its book value and suggests the market values the company at less than its accounting worth. Value investors often view P/B ratios below 1.0 as potential buying opportunities, assuming the company’s assets are accurately valued.

A P/B ratio above 1.0 means the stock trades above its book value, indicating that investors expect future growth or value the company’s intangible assets highly. 

Growth companies and technology firms typically have P/B ratios well above 1.0 because their value lies in intellectual property and future earnings potential rather than physical assets.

For example, a stock trading at $50 per share with a book value per share of $40 has a P/B ratio of 1.25 ($50 ÷ $40). The market values this company 25% above its accounting worth.

P/B ratios vary significantly by industry: 

• Banks and insurance companies typically have P/B ratios between 0.8 and 1.5 because their assets are primarily financial and tangible. 
• Technology and software companies often have P/B ratios above 5.0 because their value comes from intangible assets like patents and intellectual property. 
• Manufacturing and industrial firms typically fall in between with P/B ratios around 1.5 to 3.0.

Investors should compare P/B ratios within the same industry rather than across different sectors. A P/B ratio of 0.9 might signal undervaluation for a bank but could be normal for a mature industrial company.

What Are Book Value’s Limitations?

Book value doesn’t usually capture intangible assets such as patents, software, trademarks, or customer relationships. These assets can be significant drivers of market value, especially for technology or service-oriented companies.

A software company’s value might lie mainly in its code and intellectual property. The book value might appear low because intangible assets aren’t fully reflected on the balance sheet, even though the company could be highly valuable in the market.

Investors often compare book value and market value together to get a complete picture. A wide gap between book value and market value can reveal whether the market expects strong future growth or has concerns about the company’s performance.

Bottom Line

Book value is a company’s net worth calculated by subtracting total liabilities from total assets, representing the accounting value shown on the balance sheet. Book value is most relevant for asset-heavy industries like banking, manufacturing, and real estate, where tangible assets represent the majority of company value. 

Investors use book value through metrics such as book value per share and the price-to-book ratio, and should combine it with market-based valuation metrics for a comprehensive analysis.

Frequently Asked Questions: Book Value

What is book value?

Book value is a company’s net value calculated by subtracting total liabilities from total assets. It represents the accounting value of a business as shown on the balance sheet.

How do you calculate book value?

Book value is calculated by subtracting total liabilities from total assets. Both figures are found on a company’s balance sheet. The result represents the company’s net accounting value.

What’s the difference between book value and market value?

Book value is the accounting value based on a company’s balance sheet, while market value is what investors are willing to pay for the company’s stock. Market value often exceeds book value for growth companies because it reflects future earnings potential and intangible assets.

Is book value the same as shareholders’ equity?

Yes, book value and shareholders’ equity are usually the same. Both terms refer to the residual value of a company’s assets after subtracting liabilities. Book value and shareholders’ equity are often used interchangeably in financial analysis.

How is book value used in financial analysis?

Book value is used in financial analysis through book value per share (BVPS) and the price-to-book (P/B) ratio to assess stock valuation. Analysts compare book value to market capitalization to determine whether shares trade at a premium or discount to accounting value. 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Goodwill
• Par Value
• Senior and Subordinated Debt
• Types of Assets
• See all Accounting resources