Book Value

1. Definition

Book Value is the net value of a company's assets found on its balance sheet, calculated as total assets minus total liabilities. It represents the Shareholders' Equity. Theoretically, it is the amount that shareholders would receive if the company were liquidated, all assets sold, and all debts paid off at their recorded accounting values.

2. Calculation

$$ \text{Book Value} = \text{Total Assets} - \text{Total Liabilities} = \text{Shareholders' Equity} $$

• Book Value Per Share (BVPS): Calculated by dividing total equity by the number of outstanding shares.

3. Characteristics & Significance

3.1. Historical Cost Basis

Book value is typically based on the historical cost of assets (minus depreciation), not their current market price. Therefore, it may not reflect the true market value of assets like real estate or intellectual property that may have appreciated over time.

3.2. Investment Metric (P/B Ratio)

The Price-to-Book (P/B) Ratio compares a company's market capitalization to its book value. * P/B < 1: The stock is trading below its book value (potentially undervalued or financially troubled). * P/B > 1: The stock is trading at a premium (market expects future growth).

4. Limitations

For companies in the technology or service sectors, which rely heavily on intangible assets (brand, IP, human capital) that are not fully captured on the balance sheet, Book Value often significantly understates the company's true economic worth.