Book Value

Key takeaways
* Book value (shareholders’ equity) equals a company’s total assets minus its total liabilities.
* Book value per share (BVPS) and the price-to-book (P/B) ratio help investors assess whether a stock may be undervalued or overvalued.
* Market value often exceeds book value because it reflects intangible assets, future earnings expectations, and investor sentiment.
* Investor-focused book value refers to the “Total Shareholders’ Equity” line on the balance sheet and is distinct from managerial accounting valuations of individual assets.

What is book value?

Book value is the net worth of a company from an accounting perspective: total assets minus total liabilities. It represents the residual claim that shareholders would theoretically receive if the company were liquidated. On financial statements, book value is reported as total shareholders’ equity.

How book value works

Book value is derived from historical accounting records and typically excludes many intangible or forward-looking items such as brand value, patents, human capital, and expected future profits. Because of that, book value can differ substantially from market value, which reflects investors’ expectations and perceptions about future performance and intangible assets.

Book value appears on the balance sheet and is used:
* As a component in valuation ratios (BVPS, P/B).
* To compare against market capitalization to gauge potential under- or overvaluation.
* As a basic indicator of financial health alongside other metrics.

Book value per share (BVPS)

BVPS shows book value on a per-common-share basis, useful for comparing to the market price per share.

Formula:
BVPS = (Total Shareholders’ Equity − Preferred Stock) ÷ Total Common Shares Outstanding

Example:
If shareholders’ equity = $21,000,000 and common shares outstanding = 2,000,000:
BVPS = $21,000,000 ÷ 2,000,000 = $10.50

If the market price per share is higher than BVPS, the market is pricing the stock above its accounting book value.

Price-to-book (P/B) ratio

The P/B ratio measures market price relative to book value per share and is commonly used to compare companies within the same industry.

Formula:
P/B = Market Price Per Share ÷ Book Value Per Share

Example:
If BVPS = $10.50 and market price = $13.17:
P/B = $13.17 ÷ $10.50 = 1.25

A P/B greater than 1 means the market values the company above its book value. Interpretation depends on industry norms and accounting practices; a low P/B in one sector may be normal in another.

Practical examples

• On a company balance sheet, the line labeled “Total Shareholders’ Equity” (or an equivalent caption) is the book value. For large public companies, this number can run into billions of dollars.
• The composition of shareholders’ equity may include common stock, preferred stock, additional paid-in capital, retained earnings, treasury stock adjustments, and accumulated other comprehensive income. Specific line items vary by company and industry.

Why is it called “book value”?

The term comes from bookkeeping and accounting—historically the company’s value as recorded in its books (ledgers).

What does a P/B ratio of 1.0 mean?

A P/B of 1.0 means the market price equals the accounting book value per share. For value-oriented investors, this can signal that the market is not assigning a premium for intangible assets or future growth.

Why market value is often higher than book value

Book value usually excludes or undervalues:
* Intangible assets (brands, patents, goodwill)
* Human capital and organizational know-how
* Expected future earnings and growth

Market value incorporates these elements along with investor expectations and sentiment, so it is frequently higher than book value.

Bottom line

Book value is a straightforward accounting measure of net worth (assets − liabilities) and serves as the basis for BVPS and the P/B ratio. These metrics are useful starting points for valuation, particularly when comparing similar companies in the same industry. However, because book value is based on historical accounting and may omit intangible and future-oriented drivers of value, it should be used alongside other financial and qualitative analyses.