The book value of a company is the net difference between that company’s total assets and total liabilities, where book value reflects the total value of a company’s assets that shareholders of that company would receive if the company were to be liquidated.
An asset’s book value is equivalent to its carrying value on the balance sheet.
Book value is often lower than a company’s or asset’s market value.
Book value per share (BVPS) and the price-to-book (P/B) ratio are utilized in fundamental analysis.
Book value is the accounting value of the company’s assets less all claims senior to equity (usually the company’s liabilities). The term book value derives from the accounting practice of recording asset value at the original historical cost in the books.
While the book value of an asset may stay the same over time by accounting measurements, the book value of a company collectively can grow from the accumulation of earnings generated through asset use. Since a company’s book value represents the shareholding worth, comparing book value with the market value of the shares can serve as an effective valuation technique when trying to decide whether shares are fairly priced.
As the accounting value of a firm, book value has two main uses:
It serves as the total value of the company’s assets that shareholders would theoretically receive if a company was liquidated.
When compared to the company’s market value, book value can indicate whether a stock is under or overpriced.
