Book value
Key points
- Book value per share is the denominator of the P/B ratio.
- A share price below book value can mean the market distrusts the assets or that a bargain exists.
- real estate and subsidiaries carried at historical cost may be far below true value; inflation accounting partly closes this gap.
Formula / calculation
Book value = Total assets − Total liabilities = Equity; Book value per share = Equity / Total shares. Tangible book value also deducts goodwill and intangibles.
Interpretation
A share price below book value can mean the market distrusts the assets or that a bargain exists. Book value growing over time (retained earnings) shows shareholder value accumulating.
Pitfalls
real estate and subsidiaries carried at historical cost may be far below true value; inflation accounting partly closes this gap. Items such as goodwill can inflate book value. Brands and human capital do not appear in the books.
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Frequently asked questions
What is Book value?
Book value is the equity value found by subtracting total liabilities from total assets according to the company’s accounts.
How is Book value calculated?
Book value = Total assets − Total liabilities = Equity; Book value per share = Equity / Total shares. Tangible book value also deducts goodwill and intangibles.
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