Book Value

Book value is the value of a company as recorded in its own accounts: total assets minus total liabilities, which equals shareholders' equity on the balance sheet. It is sometimes called net asset value or, more loosely, asset value. The same phrase is used for a single asset, where it means the carrying amount: original cost less accumulated depreciation, amortization and impairment.

Investors use book value as an accounting anchor for what a business is worth, and compare it with market capitalization, the value the stock market puts on the same equity. The two can differ widely. Book value is closely related to net worth for individuals and to net asset value for investment funds, where holdings are marked to market each day.

Picture a family that sells everything it owns at the prices written in its own records and then pays off every debt. Whatever is left is its book value. The catch is that the records may be out of date: a house bought decades ago may still be listed at the old price, and the family's skills and reputation are not listed at all.

A company works the same way. Book value is what the accounts say the owners would have left, not what a buyer would actually pay. A buyer might offer much more for a firm with strong brands, or less for one whose machines are worth little outside the factory.

The basic calculation is:

Dividing by the number of shares gives book value per share (BVPS):

• $\text{Shareholders' equity}$ is the equity total from the balance sheet.
• $\text{Preferred equity}$ is removed because preferred shareholders have a prior claim.
• $\text{Common shares outstanding}$ is the number of common shares in issue, excluding treasury shares.

Worked example: a company reports assets of $900 million and liabilities of $600 million, so its book value is $300 million. With no preferred shares and 30 million common shares, BVPS is $300 \div 30 = 10$ dollars. If the shares trade at $15, the price-to-book ratio is $15 \div 10 = 1.5$.

Analysts often prefer tangible book value, which strips out goodwill and other intangibles because they may be worth little in a liquidation. The idea mirrors tangible net worth used by lenders.

Several features of accounting create a gap between book and market value:

• Historical cost. Land, buildings and equipment are usually carried at what was paid, less depreciation, so decades of price rises may not show.
• Missing intangibles. Internally developed brands, software, customer relationships and intellectual property are mostly expensed rather than recorded, so knowledge-heavy firms often trade at many times book.
• Expectations. The market prices future earnings and growth, while book value records past transactions.
• Asset quality. Book value can overstate worth when loans are likely to go bad or inventory is obsolete, which is why some banks trade below book.

Share buybacks, which return cash to each shareholder who sells, also reduce book value, sometimes pushing it below zero for highly profitable companies, which makes ratios based on it hard to read.

Value investors have long used low price-to-book stocks as a screen, an approach associated with Benjamin Graham and later formalized in academic research. Eugene Fama and Kenneth French included a value factor based on book-to-market ratios in their three-factor model (1993), which extended the capital asset pricing model. Critics note that the factor performed poorly for much of the 2010s as intangible-rich firms grew, and that book value captures less of a modern company's worth than it once did. In his 2018 shareholder letter, Warren Buffett said Berkshire Hathaway would stop emphasizing changes in book value per share for that reason.

Book value carries most weight in banking and insurance, where assets are mainly financial and closer to market value. Bank analysts track price to tangible book closely, and regulatory capital begins with accounting equity before deductions. In Japan, the Tokyo Stock Exchange in March 2023 asked listed companies, especially those trading below book value, to disclose plans for improving capital efficiency and share prices, which led many firms to raise dividends and buy back shares.

For a single asset, book value falls over time as depreciation is charged. A $50,000 machine depreciated straight-line over five years has a book value of $30,000 after two years. If it is sold for $35,000, the business records a $5,000 gain; if sold for $25,000, a $5,000 loss. Tax rules often use different depreciation schedules, so the tax book value can differ from the accounting one, creating deferred tax.

• Investor.gov (US SEC): Book value
• Berkshire Hathaway: 2018 letter to shareholders