Book Value

Book value is the net asset value of a company as shown on its balance sheet, calculated by subtracting total liabilities from total assets. It represents the theoretical value that shareholders would receive if the company liquidated all its assets and paid off all its debts. Book value per share divides this figure by the number of outstanding shares. Book value is primarily an accounting measure. It reflects historical costs and accounting rules rather than current market values. A building purchased 20 years ago appears on the balance sheet at its depreciated historical cost, not its current market value. This limitation means book value can significantly understate or overstate actual economic value. Investors use book value in several ways. The price-to-book (P/B) ratio compares a stock's market price to its book value per share. A P/B below 1 means the stock trades for less than its accounting value, potentially indicating undervaluation. Value investors often screen for low P/B stocks as potential bargains. However, book value is more relevant for some industries than others. For banks and insurance companies, where assets are mostly financial instruments carried at near-market values, book value is meaningful. For technology companies, whose value derives largely from intellectual property and human capital not captured on balance sheets, book value matters less. The difference between book value and intrinsic value is important. Book value is backward-looking, based on historical costs. Intrinsic value is forward-looking, based on expected future cash flows. A company with modest book value but excellent growth prospects might have high intrinsic value. Conversely, a company with substantial book value but declining prospects might be worth less than its accounting suggests. Book value provides one data point in comprehensive analysis but shouldn't be used in isolation. Understanding what assets and liabilities comprise book value, and how they relate to the company's actual business value, is essential for proper interpretation.