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What Is Book Value?
For value investors, book value is the sum of the amounts of all the line items in the shareholders' equity section on a company's balance sheet. You can also calculate book value by subtracting a business's total liabilities from its total assets.
There is also a book value used by accountants to valuate assets owned by a company. This differs from book value for investors because it is used internally for managerial accounting purposes.
Key Takeaways
- A company's book value is the sum of all the line items in the shareholders' equity section of a balance sheet.
- Book value is often different than a company's market value.
- Book value per share (BVPS) and price-to-book (P/B) ratio are utilized in fundamental analysis.
Understanding Book Value
Shareholders' equity is a section on a company's balance sheet that explains where their money is. The image below is Amazon's consolidated balance sheet for its 2022 fiscal year. Pay attention to the Liabilities and Stockholders' Equity (in the red box, also called shareholders' equity) section.
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On the balance sheet, you see "Total Stockholders' Equity" with a value of $138.2 billion. This figure is calculated by adding the values of preferred stock, common stock, Treasuries, paid-in capital, additional comprehensive income, and retained earnings. Some companies include unrealized gains or losses, capital surplus or cumulative adjustments, and many other line items, depending on the industry the company operates in and its internal accounting procedures.
The following image shows that Coca-Cola has an "Equity Attributable to Shareowners" line. In this case, this would be the book value for an investor valuating Coca-Cola.
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Since a company’s book value represents the shareholding worth, comparing book value with the market value of the shares can serve as an effective valuation technique when trying to decide whether shares are fairly priced.
Book Value Uses
Book value has two main investor uses:
- It is used in other financial ratios to help investors valuate a company
- As a comparison to the company's market value, book value can indicate whether a stock is underpriced or overpriced.
Book value is also included in some financial ratios that help investors learn more about a company's financial situation.
Book Value per Share (BVPS)
Book value per share (BVPS) is a quick calculation used to determine the per-share value of a company based on the amount of common shareholders' equity in the company. To get BVPS, you divide total shareholders' equity by the total number of outstanding common shares.
So, if a company had $21 million in shareholders' equity and two million outstanding common shares, its book value per share would be $10.50. Keep in mind this calculation doesn't include any of the other line items that might be in the shareholders' equity section, only common shares outstanding.
There is a difference between outstanding and issued shares, but some companies might call outstanding common shares "issued" shares in their reports.
Price-to-Book (P/B) Ratio
Price-to-book (P/B) ratio as a valuation multiple is useful for comparing value between similar companies within the same industry when they follow a uniform accounting method for asset valuation. The ratio may not serve as a valid valuation basis when comparing companies from different sectors and industries because companies record their assets differently.
As a result, a high P/B ratio would not necessarily be a premium valuation, and conversely, a low P/B ratio would not automatically be a discount valuation.
The price-to-book ratio is simple to calculate—you divide the market price per share by the book value per share. In the previous example, the book value per share was $10.50. So, if the company's shares had a current market value of $13.17, its price-to-book ratio would be 1.25 ($13.17 ÷ $10.50).
Why Is It Called ‘Book Value’?
Book value gets its name from accounting lingo, where the accounting journal and ledger are known as a company’s “books.” In fact, another name for accounting is bookkeeping.
What Does a Price-to-Book (P/B) Ratio of 1.0 Mean?
A P/B ratio of 1.0 indicates that the market price of a company’s shares is exactly equal to its book value. For value investors, this may signal a good buy since the market price of a company generally carries some premium over book value.
Why Is Market Value Often Higher Than Book Value?
Book value only uses a company's total shareholder equity. It may not include intangible assets such as patents, intellectual property, brand value, and goodwill. It also may not fully account for workers' skills, human capital, and future profits and growth. Therefore, the market value — which is determined by the market (sellers and buyers) and is how much investors are willing to pay by accounting for all of these factors — will generally be higher.
The Bottom Line
Book value is the value of a company's total assets minus its total liabilities. In other words, it is equal to total shareholders' equity. A company's market value will usually be greater than its book value since the market price incorporates investor's thoughts and calculations about intangible assets such as intellectual property, human capital, and future growth prospects. Value investors look for companies with relatively low book values (using metrics like P/B ratio or BVPS) but otherwise strong fundamentals as potentially underpriced stocks in which to invest.
Correction—Aug. 24, 2023: This article was corrected from a previous version that combined managerial accounting book value with value investing book value, which are two different concepts. As the article now states correctly, investing book value is the line item "Total Shareholders' Equity" or an equivalent entry from a company's balance sheet.
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