Glossary
Book value
A company's total assets minus total liabilities as recorded on the balance sheet; the accounting value of shareholders' equity.
Book value is what a company's shareholders would own on paper if every asset were sold at the value shown on the balance sheet and every liability paid off. It equals total assets minus total liabilities, which is the same as shareholders' equity. Investors compare it with the stock's market price to judge whether a company is cheap or expensive relative to its accounting net worth.
How it is calculated
Preferred stock, if any, is usually subtracted as well, so the figure reflects common shareholders only.
Where it is useful, and where not
Book value is most meaningful for asset-heavy businesses whose balance sheets are close to market value, such as banks, insurers and some industrial firms. Bank investors watch tangible book value closely.
It says much less about companies whose value lies in brands, software, patents or people, because most internally created intangibles never appear on the balance sheet. Large buybacks also shrink book value and can even turn it negative while the business thrives. A low P/B can signal a bargain, or a company whose assets are worth less than their stated values.
The term also has a separate tax and accounting meaning for a single asset: its cost minus accumulated depreciation.