Book Value — What Is It?
Book value is the value of company assets minus liabilities, recorded in balance sheet. Learn how to use P/B ratio in investing.
What is Book Value?
Book value is the value of company assets minus liabilities, derived from the balance sheet. In other words — how much would remain for shareholders if the company sold all assets and paid off debts.
Formula: Book Value = Total Assets - Total Liabilities
Book Value Per Share (BVPS): BVPS = Book Value / Number of Shares Outstanding
P/B Ratio (Price to Book)
P/B = Stock Price / Book Value Per Share
| P/B | Interpretation |
|---|---|
| < 1.0 | Stock valued below book value — potential opportunity |
| 1.0-2.0 | Fair valuation for traditional companies |
| 2.0-5.0 | Premium — market values intangible assets |
| > 5.0 | High valuation — typical for tech/growth |
Why P/B < 1 doesn't always mean opportunity
A company with P/B 0.5 might be cheap — or it might have:
- Declining revenues
- Obsolete assets (real estate worth less than on balance sheet)
- Hidden liabilities
- Management problems
Book Value vs Intrinsic Value
Book value is a number from balance sheet — historical, based on asset acquisition costs. Intrinsic value is an estimate of company's future ability to generate profits.
For tech companies (Google, Microsoft), intrinsic value is many times higher than book value because main assets are people, technology, and brand — things invisible on balance sheet.
For banks and industrial companies, book value is a better approximation of real value.
When is P/B useful?
- Banks and insurers — assets (loans, investments) easy to value
- Real estate companies — properties have concrete value
- Companies in crisis — check if price fell below liquidation value
- Industry comparisons — one company's P/B vs industry average
Book Value limitations
- Doesn't include intangible assets — brand, patents, know-how
- Historical costs — real estate bought 20 years ago might be worth many times more
- Depreciation — machinery might be depreciated to zero but still functional
- Different accounting standards — IFRS vs US GAAP give different results
How Freenance can help
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