Baffled by book value? This guide breaks down what book value is, how to calculate it, and how investors can use it to spot potential opportunities.
6 min read
There are a lot of complex metrics for what signals a successful company. Before putting their money into an investment, investors want to get a complete picture of a company’s health — including how much debt it’s carrying. The metric for this? Book value. So, what is book value? This article explains the essentials so that you can make more thoughtful financial decisions if you’re investing your money.
What is book value?
Book value is a key metric that reveals a company’s true worth by looking at its net assets. It’s calculated by subtracting the company’s liabilities from its total assets. Therefore, the basic book value calculation looks like this: assets – liabilities = book valueThis formula gives you a clear picture of what’s left for shareholders after all debts are paid off. Assets can include everything from physical items like equipment and property to intangible assets like patents, trademarks, intellectual property, and goodwill.Imagine a company with $2 million in assets and $500,000 in liabilities. By subtracting the liabilities from the assets, you get its book value: $1.5 million. This simple calculation is a powerful tool for investors, helping them gauge whether a company’s stock price truly reflects its underlying value.
Forget about fees with N26 Standard
Discover 100% digital banking with zero hidden fees. Open your bank account in 8 minutes, right from your phone.
So, that’s how to calculate net book value for a whole company, but you can also calculate this at the stock level. Book value per share (BVPS) is a way to figure out a company's net worth per share. It’s the amount that would be paid out per share if the company were to be liquidated. For example, let's say a company’s book value is $1.5 million. To find BVPS, we divide that by the number of outstanding shares they have. So, if they had 500,000 outstanding shares, the BVPS would be $3 per share. Investors can then compare BVPS to the stock’s current market price to see if it’s a worthwhile investment.
What are the limitations of book value?
The book value calculation is useful, but it does have limitations. Here are a few of the things to keep in mind:
Historical cost: Book value is based on historical cost, which may not reflect current market conditions. That means that the value recorded on the balance sheet can be different from the asset’s actual financial market value.
Depreciation: Depreciation means that tangible assets lose value over time. This process may bring down a company’s book value even when an asset’s market value stays stable or increases. In other words, based on book value, a company could seem weaker than it actually is.
Intangible assets: Companies with significant intangible assets, such as intellectual property, brand reputation, or goodwill, may show a lower book value. Often, these assets aren’t fully captured in the book value calculation, and their valuation could be underestimated.
These limitations are a good reminder for investors to consider all of the factors when evaluating a company — book value might not fully represent the company's true worth.
What’s the difference between book value and market value?
A company’s market value is often different from its book value — which, as we know, is simply the company’s assets minus their liabilities. The two numbers can vary because market value takes growth expectations, investor sentiment, and factors like intangible assets into account. The book value formula doesn’t capture those kinds of factors, so comparing the two measures of value can be useful for investors. Let’s look at how they relate to each other.
What’s the relationship between book value and market value?
We can consider book value and market value in relation to one another, as a ratio. The book-to-market ratio shows how the market values a company relative to its net assets. A high ratio may suggest that a stock is undervalued — i.e. its market price is lower than its book value. This could potentially point to a value investment opportunity. In contrast, a low book-to-market ratio may mean that a stock is overvalued. Investors may be pricing high-growth expectations that are higher than the company's tangible net assets. In analysis, investors use this ratio to identify mispriced stocks and strike a balance between fundamental metrics and market sentiment.
How to use book value: key applications
As we’ve seen, book value can help with assessing a company's financial health and identifying undervalued opportunities in the stock market. Investors can also use the book value calculation to make strategic decisions during mergers and acquisitions.Here's how experts use book value in financial analysis and in mergers and acquisitions.
Using book value in financial analysis
Using the book value equation helps identify the net asset value that underpins a company’s operations. In particular, analysts and investors often turn to the book value of equity. They use this as a metric for evaluating undervalued companies and spotting potential investment opportunities for their portfolios.When the market price of a stock falls below its book value per share, it may indicate that the company is undervalued. The discrepancy between market value and book value can highlight cases where the market is overlooking the true financial strength of a business. Savvy investors, especially those focusing on value investing, might want to take a closer look at its long-term investment potential.
Using book value in mergers and acquisitions
In mergers and acquisitions, book value acts as a benchmark for setting fair acquisition prices. As a snapshot of a company’s tangible net assets, it can be a general foundation for negotiations — prospective buyers can gauge the true value of a potential acquisition. This approach gives both parties a transparent view of the financials before finalizing a deal.If you want to assess a company’s financial strength, then book value is a must-have. Whether looking for undervalued companies to buy as a value investment or determining fair acquisition prices, the book value equation is a fundamental tool in financial analysis and investment decision-making.
Investments made easy
With N26, you can buy stocks and ETFs without leaving your banking app. Get started from as little as €1.
You know what’s best for you and your money. That’s why we offer a 100% mobile banking experience that puts you in the driver’s seat. With N26, you’ll enjoy fully modern banking that makes saving as easy as 1-2-3. Our premium accounts like N26 Smart offer up to 10 Spaces sub-accounts — virtual piggy banks where you can save for what matters most. Assign them their own IBANs to transfer money in and out — perfect for managing rent, planning vacations, and much more. Ready for a banking experience you’ll truly love? Compare our accounts and find the one that fits your lifestyle today.
FAQs
Book value shows the worth of a company’s net assets (assets minus liabilities). Liquidation value estimates the amount that could be recovered if the company sold all of its assets and immediately settled its liabilities.
Yes, book value can be negative when a company’s liabilities are more than its assets. This can also be a strong sign of financial distress.
Book value is typically calculated at the end of each accounting period, with quarterly and annual financial reports providing updated figures.
Book value offers insight into a company’s net worth but doesn't directly predict future stock performance — and anyways, with investing, the future is never guaranteed. Besides book value, investors can also consider market trends and earnings growth.
Some industries have significant intangible assets, like tech or services. Companies in these sectors may show lower book values, while capital-intensive sectors typically have clearer tangible asset values.
