Book value

Book value is the total value of the net assets of a company attributable to - or owned by - shareholders.

Book value is also known as equity, shareholders' funds, or net asset value (NAV). It is the value of all of a company's assets, less all of its liabilities (debts). Book value is sometimes used as an estimate of what a company would be worth if all of its assets were sold for their balance-sheet values. It’s often used as a way to value firms such as banks, housebuilders, and insurers. If you know the book value, you can get an idea of how cheap or expensive a share is by dividing the share price by the book value per share (hence the price/book, or p/b, ratio).

A p/b of below one means that – technically speaking – you can buy the company for less than its assets are worth on paper. In other words, if you could buy the whole company, you could sell everything it owned, and still make a profit.

One potential problem with this, of course, is that the book value of a company may not reflect what you would actually get were you to sell its assets. In particular, it may contain lots of intangible assets, such as goodwill, which often relates to the value of a brand. Intangibles – unlike a factory or a piece of land – can be very tricky to measure objectively. They may in fact not be worth very much at all, particularly when they need to be sold urgently. So if a company persistently trades on an unusually low p/b ratio, that could imply investors doubt its assets are worth as much as it claims, rather than meaning it’s a bargain.

If you subtract intangible assets from a company’s book value, you end up with a more conservative number, known as tangible book value, based on hard assets, such as land, buildings, machinery, stocks and cash. You can then divide this figure by the number of shares to get tangible book value per share. If you can buy a stock for a lot less than this figure (a relatively rare event), you may be getting a genuine bargain.

See Tim Bennett's video tutorial: Beginner's guide to investing: the price-to-book ratio.

Recommended

What to do as the age of cheap money and overpriced equities ends
Investment strategy

What to do as the age of cheap money and overpriced equities ends

The age of cheap money, overpriced equities and negative interest rates is over. The great bond bull market is over. All this means you will be losin…
29 Sep 2022
There is light at the end of the tunnel for investors
Sponsored

There is light at the end of the tunnel for investors

Investors are gloomy. But it’s not all bad, says Max King – the mood could be about to shift. You just need to hold your nerve for a little while long…
27 Sep 2022
The hidden cost of employee share schemes
Investment strategy

The hidden cost of employee share schemes

Paying employees in shares comes at a cost to investors – but it isn’t always easy to see how much, says Stephen Clapham.
26 Sep 2022
Investors are still in denial about inflation and interest rates
Global Economy

Investors are still in denial about inflation and interest rates

There are worrying signs that inflation is becoming embedded in the economy, but many investors are struggling to adjust to the new reality.
23 Sep 2022

Most Popular

What to do as the age of cheap money and overpriced equities ends
Investment strategy

What to do as the age of cheap money and overpriced equities ends

The age of cheap money, overpriced equities and negative interest rates is over. The great bond bull market is over. All this means you will be losin…
29 Sep 2022
Why everyone is over-reacting to the mini-Budget
Budget

Why everyone is over-reacting to the mini-Budget

Most analyses of the chancellor’s mini-Budget speech have failed to grasp its purpose and significance, says Max King
29 Sep 2022
Mini-Budget: will Kwasi Kwarteng’s gamble on growth work?
Budget

Mini-Budget: will Kwasi Kwarteng’s gamble on growth work?

The government has launched the biggest dash for growth in 50 years, relaunching an approach known as supply-side economics. What is the plan – and wi…
30 Sep 2022