Book value (also known as equity, shareholders’ funds, or net asset value) is the value of all a company’s assets, minus its liabilities. The number can be found on the balance sheet in an annual report.
It is sometimes used to estimate what a firm would be worth if all its assets were sold, and is often used to value banks and house-builders. But book value may contain intangible assets, such as ‘goodwill’, which may not be worth much at all.
By subtracting these from book value, you get a more conservative ‘tangible’ book value, based on hard assets such as property, machinery, stocks and cash. Divide this by the number of shares to get tangible book value per share. If you can buy a stock for less than this, you may be getting a bargain.
• See Tim Bennett’s video tutorial: Beginner’s guide to investing: the price-to-book ratio.