What is book value?
In one line: Book value is a company's total assets minus its total liabilities, as shown on its balance sheet: its net worth on paper.
A simple example
Book value is a company's net worth on paper. The formula:
Book value = total assets − total liabilities
Say a company has:
- Assets (cash, buildings, inventory): $800 million.
- Liabilities (debt, bills owed): $500 million.
Book value = $800M − $500M = $300 million.
Per share, and the P/B ratio
Divide by the number of shares. Say there are 30 million shares.
- Book value per share: $300M ÷ 30M = $10.
If the stock trades at $15, the price-to-book (P/B) ratio is $15 ÷ $10 = 1.5. Buyers are paying $1.50 for each $1 of net worth on paper.
A P/B below 1 means the stock trades for less than its book value.
Why it matters
Benjamin Graham used book value as one test for a Margin of safety. If a company trades near or below its net worth, there's a cushion of real assets behind the price.
It's most useful for businesses whose value sits in things you can count, like banks and insurers, whose assets are mostly loans and bonds.
A common mistake
Using book value on companies whose value isn't on the balance sheet. A software company's real worth may be its code, brand and customers. Much of that isn't counted in book value. Its P/B can look sky-high while the business is fine. Its value just isn't on paper.
The opposite trap is a low P/B that's low for a reason. Assets can be worth less than their book value, for example old factories or loans that won't be repaid.
Book value comes from the company's latest balance sheet. You'll find it in the 10-K or quarterly report.
Questions
Is a low price-to-book ratio good?
It can point to a bargain, or to a business in trouble. You need to know why it's low.
What's the difference between book value and market value?
Book value comes from the balance sheet. Market value is the share price times the number of shares, or Market cap.
Can book value be negative?
Yes. If liabilities are bigger than assets, book value is below zero. Some companies get there through heavy buybacks or losses.
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