Book Value

Book value is a company's total assets minus its total liabilities — the accounting net worth recorded on its balance sheet — and is often expressed on a per-share basis by dividing that figure by the number of shares outstanding.

A company with $500 million in total assets and $300 million in total liabilities has a book value of $200 million. Divide that by 100 million shares outstanding and each share carries a book value of $2. That number is drawn directly from the balance sheet, using accounting figures — largely historical cost — rather than current market prices for what those assets could actually fetch if sold today.

Why book value and market cap diverge

A stock's market capitalization reflects what investors are willing to pay today, based partly on expectations for future profit. Book value reflects the accumulated accounting history of assets and liabilities. The two frequently disagree, sometimes by a wide margin. A software company with almost no physical assets but a hugely valuable brand and customer base can trade at many times its book value, because the accounting balance sheet doesn't capture most of what actually makes the business valuable.

Where book value misleads

Book value can understate a company's real worth when its most valuable assets — brands, patents, know-how, customer relationships — aren't fully reflected on the balance sheet under standard accounting rules. It can just as easily overstate worth when the recorded assets are outdated, obsolete, or worth less than their listed accounting value, as happens with aging factories or inventory nobody wants anymore. Book value is most useful for asset-heavy businesses like banks and insurers, and least useful for asset-light ones.