How to Calculate Book Value
Book value means how much a company is worth according to its financial records. You calculate it by looking at the company’s balance sheet. The book value equals the company’s total assets minus its total liabilities.
Assets are things the company owns that have value. This includes cash, inventory, equipment, buildings, and land. Liabilities are amounts the company owes to others. Examples are debt, wages owed to employees, and taxes.
The book value shows what would be left for the owners if the company sold its assets and paid off everything it owes. Think of it like your own net worth – the value of everything you own minus all your debts.
Why book value matters
Investors care about book value because it gives them an idea if a stock is overpriced or a bargain. When a stock trades below its book value, you could say it’s “on sale.” The market price is lower than what the company is worth based on its books.
Companies with a lot of physical assets, like machinery or factories, often trade closer to book value. Tech companies and others with mostly intangible assets often trade way above book value. Their value is based more on things you can’t easily measure, like intellectual property.
Calculating book value per share
Book value is often divided by the number of outstanding shares to get book value per share (BVPS). This makes it easy to compare the book value to the current market price of one share of stock.
Book value per share formula
The formula to calculate book value per share is:
BVPS = (Total Assets – Total Liabilities) / Total Shares Outstanding
You get total assets and total liabilities from the balance sheet. Shares outstanding is the total number of shares the company has issued. It’s in the shareholders’ equity section or the financial footnotes.
A book value example
Let’s look at a simple example of calculating book value and BVPS. Imagine a company, Joe’s Tractor Supply, with this balance sheet:
Assets Liabilities
Cash $50,000 Accounts Payable $30,000
Inventory $250,000 Short-term Debt $50,000
Equipment $400,000 Long-term Debt $300,000
Total $700,000 Total $380,000
Shareholders' Equity
Common Stock $200,000
Retained Earnings $120,000
Total $320,000Joe’s Tractor Supply has 100,000 shares outstanding. To find the book value:
- Add up the assets: $700,000
- Subtract the liabilities: $700,000 – $380,000 = $320,000
The book value is the same as shareholders’ equity: $320,000. To calculate BVPS:
BVPS = $320,000 / 100,000 = $3.20
If Joe’s Tractor Supply stock is trading for $10, it’s trading way above its book value of $3.20 per share.
What affects book value?
A company’s book value can change a lot over time. Things that increase or decrease assets and liabilities will change the book value.
What increases book value
Anything that increases assets more than liabilities will raise book value:
- The company makes a profit and keeps the earnings (retained earnings go up)
- It issues new shares of stock (cash from new investors becomes an asset)
- The value of its assets, like land or equipment, goes up
Decreasing liabilities has the same effect. Paying off debt lowers liabilities and increases book value.
What decreases book value
On the flip side, book value goes down if:
- The company has losses and reduces retained earnings
- It borrows money (debt is a liability)
- It buys back shares (assets decrease by the cash paid out)
- Assets lose value or are impaired (like outdated inventory getting written off)
Depreciation and book value
An important factor that lowers book value over time is depreciation. Companies gradually reduce the recorded value of long-term assets as they wear out. This adds an expense each year and lowers the asset’s value on the balance sheet.
Depreciation recognizes that assets like equipment lose value as they age. But it’s an accounting entry, not a cash cost. It can make book value understate what the company’s assets could really sell for.
Book value vs. market value
Book value tells you the accounting value of a company based on its books. But investors care more about market value – what a stock is actually trading for. This depends on investors’ expectations about the company’s future prospects.
When market value is higher
Market value is often way higher than book value, especially for growing companies. Investors are willing to pay more because they expect the company’s earnings (and stock price) to keep going up.
Think of a fast-growing tech company. Its book value might be low since it doesn’t own a lot of physical assets. But investors see potential in its intellectual property, brand, and ability to innovate. They bid the stock price way above book value.
What a low price-to-book ratio means
Looking at the ratio of a stock’s price to its book value is one way to spot potential bargains. A low price-to-book ratio means you’re not paying much above the company’s accounting value.
This can mean the stock is undervalued. Maybe investors are too pessimistic about its prospects. If those views change, the price could jump as investors bid it back up.
But a low price-to-book can also mean there are real problems. The company’s assets might be outdated or losing value fast. Tread carefully and do your homework.
The limits of book value
Book value is a useful metric but it has limits. It’s an accounting construct, not a true measure of what a company is worth. There are a few key things it misses:
Intangible assets
Many of a modern company’s most valuable assets don’t show up with much book value. Things like patents, trademarks, brand recognition, and software often aren’t on the balance sheet at all. Or they’re recorded at a value way below what they’re really worth.
Asset values
Book value relies on the historical cost of assets. The true market value could be very different, higher or lower. Think of land a company has owned for decades. Its value has probably gone way up.
Earnings power
Ultimately, investors care about a company’s ability to generate future profits and cash flow. Book value is a static measure at a point in time. It doesn’t tell you much about future earnings potential.
When book value is negative
Sometimes, a company’s book value can be negative. This happens if its liabilities are bigger than its assets.
A negative book value is a red flag. But it doesn’t always mean the company is worthless. Intangible assets or the ability to generate future profits could give it real value. Still, negative equity tells you the company is in some trouble.
Book value is a starting point
When you calculate book value, you’re seeing the company’s equity value based on its accounting records. It’s a fundamental metric to know. Comparing the market price to book value can tell you a lot about how investors view the company.
But book value isn’t the whole story. It’s a look in the rearview mirror based on historical costs. Smart investors look at a whole range of metrics to estimate a company’s true value. They think about the worth of intangible assets and the potential for future growth.
Use book value as a starting point in your analysis. But combine it with other tools to get a complete picture of what the company is really worth.
