Book Value: Definition, Meaning, Formula, and Examples

What Is Book Value?

Book value is the value of a company's assets after netting out its liabilities. It approximates the total value shareholders would receive if the company were liquidated.

The figure that represents book value is the sum of all of the line item amounts in the shareholders' equity section on a company's balance sheet. As noted above, another way to calculate book value is to subtract a business' total liabilities from its total assets.

There is also a book value used by accountants to value the assets owned by a company. This differs from the book value for investors because it is only used internally for managerial accounting purposes.

Understanding Book Value

Shareholders' equity is a section on a company's balance sheet that displays the shareholders' claim on assets after liabilities have been accounted for. The image below is Amazon's consolidated balance sheet for its 2022 fiscal year. Note the Liabilities and Stockholders' Equity section, and in particular the stockholders' equity details within the red outline.

You'll see "Total Stockholders' Equity" with a value of $138.2 billion. That is Amazon's book value. This figure is calculated by adding the values of preferred stock, common stock, Treasuries, additional paid-in capital, accumulated other comprehensive income (or loss), and retained earnings.

Some companies include in this section unrealized gains or losses, capital surplus or cumulative adjustments, and many other line items, depending on the industry a company operates in and its internal accounting procedures.

The following image shows Coca-Cola's "Equity Attributable to Shareowners" line at the bottom of its Shareowners' Equity section. In this case, that total of $24.1 billion would be the book value of Coca-Cola. It's one metric that an investor may look for if they're interested in valuating Coca-Cola as a potential investment.

Since a company’s book value represents net worth, comparing book value to 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 uses for investors:

• It is used in and with other financial ratios to help investors value a company.
• When compared 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 can help investors size up a company's financial health.

Book Value per Share

Book value per share (BVPS) is the per-share book value. Investors can calculate it easily if they have the balance sheet of a company of interest. Investors can compare BVPS to a stock's market price to get an idea of whether that stock is overvalued or undervalued.

To get BVPS, you divide the figure for total common shareholders' equity by the total number of outstanding common shares. To obtain the figure for total common shareholders' equity, take the figure for total shareholders' equity and subtract any preferred stock value. If there is no preferred stock, then simply use the figure for total shareholder equity.

BVPS = Total Shareholder Equity - Preferred Stock / Total Common Shares Outstanding

So, if a company had $21 million in shareholders' equity (and no preferred stock) and two million outstanding common shares, its book value per share would be $10.50:

BVPS = $21 million / 2 million

BVPS = $10.50

If the market price for a share is higher than the BVPS, then the stock may be seen as overvalued.

Price-to-Book (P/B) Ratio

Price-to-book (P/B) ratio as a valuation multiple is useful when comparing similar companies within the same industry that follow a uniform accounting method for asset valuation. It can offer a view of how the market values a particular company's stock and whether that value is comparable to the BVPS.

The ratio may not serve as a valid valuation basis when comparing companies from different sectors and industries because companies in other industries may 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 when comparing companies in different industries.

The price-to-book ratio is simple to calculate. Just divide the market price per share by the book value per share.

P/B Ratio = Market Share Price / Book Value Per Share

In the previous example, the BVPS 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:

P/B Ratio = $13.17 / $10.50

P/B Ratio = 1.25

The figure of 1.25 indicates that the market has priced shares at a premium to the book value of a share. Some may consider this to mean a stock is overvalued.

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 because 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 relatively low book values (using metrics like P/B ratio or BVPS) but otherwise strong fundamentals in their quest to find undervalued companies.

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.