Book value
Book value is a company's assets minus its liabilities, as recorded in its accounts. It is the same as shareholders' equity, the amount that would be left for the owners if the company sold everything it owns at the recorded values and paid everything it owes.
Where it comes from
The figure comes from the balance sheet: Book Value = Assets minus Liabilities. It is what the accounts say the owners' stake is worth, based on the recorded cost of what the company owns.
Book value per share and price to book
Book value per share is the book value divided by the number of shares. The price to book ratio, or P/B, divides the share price by that figure. A P/B of 2 means the market is valuing the company at twice the book value of its shares. The ratio is used a lot for banks and other businesses with big balance sheets.
Where it misleads
Book value uses recorded accounting values, not market values. A company with valuable brands, software or people can have a low book value and still be worth much more. Old property may be recorded far below what it would sell for today. So a low P/B is not by itself a sign of a bargain, and a high one is not by itself a warning.
Book value and intrinsic value
Book value is a fact from the accounts. Intrinsic value is an estimate of what a business is really worth, based on what it can earn. They are different ideas and are often far apart.
Book value per share (hypothetical numbers)
Suppose a company has assets of ₹500 crore and liabilities of ₹300 crore, so its book value is ₹200 crore. With 10 crore shares, book value per share is ₹20. If the share trades at ₹60, the price to book ratio is 60 divided by 20, which is 3.
Common questions
- What is book value in simple words?
- What is left for the owners according to the accounts: assets minus liabilities.
- What is the price to book ratio?
- The share price divided by the book value per share.
- Is a share trading below its book value a bargain?
- Not automatically. Book value uses accounting figures, and the business may be earning poorly or its assets may be worth less than recorded.
- How is book value different from market value?
- Book value comes from the accounts. Market value, or market cap, is what investors are currently paying for the company.