Book value
AccountingDefinition
Book value is the accounting value of a company - total assets minus total liabilities. It represents what shareholders would theoretically receive if the company liquidated all assets and paid off all debts. Book value per share = total equity divided by shares outstanding.
The Price-to-Book (P/B) ratio compares market price to book value. P/B below 1.0 means the stock trades below its accounting value - either it's a bargain or the market thinks the assets are overstated (common in banking crises). P/B above 3-4x is typical for asset-light companies like tech firms whose real value is in intellectual property and brand, not physical assets.
Book value has limitations: it uses historical cost for assets (a building bought in 1990 for $1M might be worth $10M today), and it ignores intangible value like brand, patents, and human capital.
The Price-to-Book (P/B) ratio compares market price to book value. P/B below 1.0 means the stock trades below its accounting value - either it's a bargain or the market thinks the assets are overstated (common in banking crises). P/B above 3-4x is typical for asset-light companies like tech firms whose real value is in intellectual property and brand, not physical assets.
Book value has limitations: it uses historical cost for assets (a building bought in 1990 for $1M might be worth $10M today), and it ignores intangible value like brand, patents, and human capital.
Formula
Book value = Total assets − Total liabilities
Example
JPMorgan: Book value ~$110/share, trades at ~$250 = P/B of 2.3x. The market values JPM at more than double its accounting value because of its earning power.
A struggling retailer: Book value $20/share, trades at $8 = P/B of 0.4x. Market thinks the assets (store leases, inventory) are worth less than stated.
A struggling retailer: Book value $20/share, trades at $8 = P/B of 0.4x. Market thinks the assets (store leases, inventory) are worth less than stated.