What is Book Value and How to Calculate It

Have you ever wondered about the true value of a company? Or what catches investors' attention? Do they rely only on analyzing profits or losses?

Multiple tools and concepts can provide investors with a comprehensive view of a company's value and financial performance, but one of the most important concepts is book value. It allows investors to gain a deeper understanding of a company's intrinsic value and how to evaluate it based on assets, liabilities, and profits. It reflects the value shown in the company's accounting books in terms of its assets and liabilities. In this article, we will highlight the concept of book value and methods of calculating it, in addition to delving into the definition of book value per share, the importance of increasing book value per share, comparing book value with market value and fair value, and finally, we will provide practical examples of how to calculate book value.  
 

Key Points

• Book value is the accounting value of a company's assets. It is calculated by subtracting the company's liabilities from its assets. This gives you the company's total equity, also referred to as shareholders' equity.
   
• There are some important steps to follow when calculating book value: first, estimate the value of owned assets; then calculate depreciation for each asset; then calculate the total value of liabilities; then subtract total liabilities from total assets.
   
• Finally, divide the equity value by the number of shares outstanding to get the book value per share.
   
• Book value per share is a metric used to determine the value per share belonging to the company based on shareholders' value and equity within the company, calculated by dividing total shareholders' equity by the total number of common shares.
   
• Increasing book value per share over time usually indicates effective financial management, and when the book value per share is higher than its trading value in the market, it is classified as a healthy indicator of the company's financial position, encouraging investors to look at the company.
   
• Price-to-book ratio, also called the earnings multiple, is an accounting tool that essentially analyzes everything the company pays for each gain the company will earn.
   
• It is better to follow more than one indicator when measuring book value, as the price-to-book ratio does not reflect the quality of returns since it depends on operating profit.
   
• Book value multiple is an evaluation used by investors to compare a company's book value relative to market value, calculated by dividing the company's market value by its book value.
   
• The main difference between book value and market value is that book value is based on the company's accounting records, while market value is based on market perceptions and the level of supply and demand in the securities market.
   
• Fair value attempts to estimate the value of assets and liabilities if the company were sold today. Fair value reflects current market conditions, not historical costs like book value.
   
• The main difference between book value and fair value is that book value is an accounting measure based on the company's historical costs, while fair value aims to estimate the current market value of the company's assets and liabilities. Fair value attempts to estimate the value of assets and liabilities if the company were sold today.
   
• Book value is the value of an asset according to the balance sheet account balance, while par value is the basic value of shares. Par value is the original cost per share when first launched in the securities market, and par value is considered the amount the company promised to pay to the shareholder at maturity, not the asset's value at the time of purchase.

What is Book Value?

Book value is the accounting value of a company's assets. It is calculated by subtracting the company's liabilities from its assets.

Book value is also classified as an accounting valuation that looks at the historical cost basis of assets and does not necessarily reflect the market value of assets, as assets are recorded at their original purchase price minus depreciation.

This gives you the company's total equity, also referred to as shareholders' equity.

Thus, you now know what book value means as a concept.

Book value helps investors evaluate a company's financial position. Book value indicates whether the stock price is below or above the true price. Book value refers to the dollar value remaining for common shareholders after liquidating all assets and paying amounts due to all creditors in the case of company liquidation. It is the most efficient tool in matters related to stocks and comparing company ratios to determine the true value of the company among competitors.

The formula used to evaluate book value is:

Book Value = Total Assets - Total Liabilities

So, what does book value mean in short? It is an integrated accounting system that helps you determine the value of assets.  

 

How is Book Value Calculated?

The concept of a company's book value is one of the most important financial concepts that investors and analysts must understand well to make sound financial decisions. But how exactly is book value calculated? The following are the most important steps for calculating a company's book value:  

1. Formula: Book value is calculated using this equation: Book Value = Total Assets - Total Liabilities.
    
2. Asset Valuation: To calculate the company's book value, estimate the value of assets owned by the company according to the amount paid to acquire them. Company-owned assets may include real estate, equipment, facilities, and other investments.
    
3. Depreciation: Depreciation is calculated for each asset, as depreciation represents the amount deducted from the original value of the asset during its period of use. Depreciation is calculated based on the method used for each type of asset.
    
4. Total Liabilities: Calculating the total value of liabilities includes calculating the total debts and obligations of the company.
    
5. Subtraction: Subtract total liabilities from total assets.
    
6. Division: Divide the equity value by the number of outstanding shares to get the book value per share (Book Value per Share = Book Value / Number of Outstanding Shares).

What is the Definition of Book Value per Share?

Book value per share is a metric used to determine the value per share belonging to the company based on the shareholders' equity within the company. It divides total shareholders' equity by the total number of common shares outstanding. In case of company liquidation, the book value per share is the cash amount that will remain for shareholders after selling all assets and settling all debts. A company's stock may be considered undervalued if its book value is greater than the market value per share.

Book value can also be classified in terms of personal finance, where the cost of securities or debt investment is its book value. Capital gain or loss on investment is calculated when company shares are sold by subtracting the sale price from the book value.

After answering the question "What does book value per share mean?" you will learn about its specific formula, which consists of the following:

Book Value per Share = Book Value / Number of Outstanding Shares

Where:

• Book Value = Total Assets - Total Liabilities
• Number of Outstanding Shares = Total shares issued by the company

What Does an Increase in Book Value per Share Indicate?

An increase in book value per share over time usually indicates effective financial management and growth in shareholder value. It shows that retained earnings are being reinvested to build assets rather than being paid out as dividends. Rising book value generally indicates that the company has substantial assets to support the stock price and operations.

The indicator of rising book value also gives investors a reference point to evaluate whether stocks are undervalued or overvalued. Comparing the current market price of the stock with its book value per share can indicate whether it is trading above or below book value. When the book value per share is higher than its trading value in the market, it is classified as a healthy indicator of the company's financial position, encouraging investors to look at the company.  
 

What is the Price-to-Earnings Ratio?

Also called the earnings multiple or P/E ratio, it is an accounting tool that essentially analyzes everything the company pays for each gain it will earn. It is based on the principle of calculating the number of years in which capital is collected or recovered, and is calculated by dividing the market price per share by earnings per share. The lower the P/E ratio, the better the indicator it is for the company's stock. For example, if the P/E ratio is 5, the investor needs to wait 5 years to recover their capital.

After learning about the meaning of the P/E ratio, learn about its specific formula, which consists of the following:

Price-to-Earnings Ratio = Market Price per Share / Earnings per Share

Earnings per Share = Net Profits Distributed to Shares / Number of Outstanding Shares

It is better to follow more than one indicator when measuring book value, as the P/E ratio does not reflect the quality of returns since it depends on operating profit.  

 

What is the Price-to-Book Multiple?

Also called the price-to-book ratio, it is an evaluation used by investors to compare a company's book value relative to market value. This is simply what is meant by the price-to-book multiple, calculated by dividing the company's market value by its book value, with the formula as follows:

Price-to-Book Multiple = Market Value per Share / Book Value per Share

Book Value = Total Assets - Intangible Assets - Total Liabilities

The purpose is to focus on the company's tangible assets that can be used to pay investors and shareholders if the company is liquidated. The price-to-book multiple indicates the number of investors willing to pay for the company's net assets. A high price suggests future earnings growth. Investors use the price-to-book multiple for the following:  
 

• Measuring whether the inventory value is inflated compared to its book value. If the price-to-book ratio is less than 1, the stock price may be undervalued relative to book value.
   
• Comparing companies in the same industries, as the average book value varies by industry.
   
• Reviewing the company's historical valuation trends, the price-to-book multiple reveals company valuations over time.

What is the Difference Between Book Value and Market Value?

The main difference between book value and market value is that book value is based on the company's accounting records, while market value is based on market perceptions and the level of supply and demand in the securities market.

While book value provides an indicator of net assets, market value better reflects the true value of the company in investors' eyes. Market value involves expectations of future performance for high-growth companies, while book value uses historical cost and does not reflect changes in asset values over time.

Market conditions, preferences, and investor perceptions affect market value regardless of what the balance sheet shows. Book value depends on the value of assets in the balance sheet, and intangible assets such as trademarks, patents, and goodwill are usually excluded from book value but are taken into account in market value.

The difference between book value and market value is not necessarily a risk indicator for companies, but a large, persistent gap may indicate issues such as inventory overvaluation or inadequate recognition of intangible assets. Therefore, comparing the two metrics provides insights into how investors view the company.  

 

What is the Difference Between Book Value and Fair Value?

The main difference between book value and fair value is that book value is an accounting measure based on the company's historical costs, while fair value aims to estimate the current market value of the company's assets and liabilities. Fair value attempts to estimate the value of assets and liabilities if the company were sold today.

Fair value reflects current market conditions, not historical costs as book value does. For example, a piece of land on the balance sheet can be valued at its purchase price twenty years ago based on its book value, while its fair value today may be much higher or lower depending on the real estate market.

Investors use fair value for several reasons:
 

• Value Assessment: Estimating whether stocks are undervalued or overvalued compared to what the company's assets could be sold for today. Comparing fair value with current stock prices helps identify potential deals or overpriced stocks.
   
• Evaluating Book Value Accuracy: If fair value deviates significantly from book value, it may indicate problems with old asset valuations in the balance sheet.
   
• Measuring Management Effectiveness: If fair value far exceeds book value, it may indicate that management is not fully utilizing assets.
   
• While book value has the advantage of being objective and based on tangible accounting figures, fair value provides a clearer perspective on the company's value under current market conditions. Investors often use both metrics together to get a complete picture.

What is the Difference Between Par Value and Book Value?

When it comes to understanding investments, financial statements, and asset valuation, terms like par value and book value play a pivotal role, as each term has specific meanings and applications in accounting and investment. The two metrics may differ in some aspects as follows:  
 

• Type of Value: Book value is the value of an asset according to the balance sheet account balance, while par value is the face value of shares. Par value is the original cost per share when first launched in the securities market. Par value is considered the amount the company promised to pay to the shareholder at maturity, not the asset's value at the time of purchase.
   
• Stability: Par value is a fixed value that does not change over time, while book value changes over time as assets are subject to depreciation, so the depreciation value is deducted from the asset value.
   
• Usage: Book value is used for accounting purposes and provides an estimate of the current value of assets on the balance sheet, while par value is used for legal and economic purposes, reflecting inflation rates and other factors that affect its value over time.
   

What are the Most Important Examples for Calculating Book Value?

To accurately calculate book value, there are many examples that help you with this. Here's an example comparing book values of two different industries:

A major investor decided to buy new stocks, and some analysts suggested two different companies: a real estate company and a technology company, with the following data:  

The investor wants to evaluate indicators for both industries to make the right decision about investing in one of the two companies, so the investor requested calculations for the following:  

1. Book Value
2. Book Value per Share
3. P/E Ratio
4. Price-to-Book Multiple

Real Estate Company:

• Book Value = Total Assets - Total Liabilities

976,724 - 500,000 = 476,724  

• Book Value per Share = Book Value / Total Number of Shares

= 476,724/13,796 = 34.55 per share  

• P/E Ratio = Market Price per Share / Earnings per Share

P/E Ratio = 4,415 / 23.04 = 191.62  

• Price-to-Book Multiple = Market Value per Share / Book Value per Share

4,415 / 34.55 = 127.7  

 

Technology Company:

• Book Value = Total Assets - Total Liabilities

= 2,019,425 - 1,302,036 = 717,389  

• Book Value per Share = Book Value / Total Number of Shares

= 717,389 / 60,000 = 11.95  

• P/E Ratio = Market Price per Share / Earnings per Share

P/E Ratio = 50,000 / 50.65 = 987.2  

• Price-to-Book Multiple = Market Value per Share / Book Value per Share

= 50,000 / 11.95 = 4,184.1

Based on measurements for the following indicators, the investor decided to invest with the real estate company for several reasons: 
 

• The company's book value is lower.
• P/E ratio: Capital will be recovered in the real estate company after a shorter period than the technology company
• Price-to-book multiple is lower for the real estate company, so it's classified as undervalued.d
• Dividend distribution rates in the real estate company are increasing by larger amounts than those of the technology company over a shorter period.

What is the Entry of Book Value?

Book value has many limitations that affect it. While book value has many advantages, there are some disadvantages and Accounting Entries resulting from relying on book value alone, such as being based on historical cost, not recognizing intangible assets, and varying calculation methods. Here are the detailed limitations of book value:  
 

• Based on Historical Cost: Book value is based on the historical cost of assets, which may differ significantly from fair market value. This means it may not reflect the true value of assets if the company is liquidated.
   
• Not Recognizing Intangible Assets: Book value does not take into account intangible assets such as trademarks, patents, and goodwill that may have significant value.
   
• Different Calculation Methods: Companies differ in their calculation methods, so book value reduces comparability between companies.
   
• Not Accommodating Growth Opportunities: Book value does not accommodate future profitability potential and growth opportunities that are key value drivers.

How Does Daftra Help You Calculate Book Value Easily?

Daftra's accounting software helps calculate book value easily thanks to the tools and advantages it provides. Daftra provides you with calculations of your total assets and liabilities to help you with book value.

It also helps automatically update asset depreciation, calculate equity directly, and provides you with the ability to enter your shares to calculate and track ratios. Additionally, there are permanent reports that help you know all your numbers and calculations, making it easier to calculate book value.

Subscribe to Daftra and get an easy and comfortable experience for your various calculations.  

 

Conclusion

Book value is an important metric for investors to consider when analyzing a company because it provides insight into the company's financial health. Book value gives investors a glimpse of the value of the company's assets if liquidated. A high book value relative to stock price may mean the stock is undervalued, making it potentially attractive to investors. However, there are some limitations that restrict relying on book value alone, which investors should consider.  

 

Frequently Asked Questions
 

What is the carrying amount?

The carrying amount is the net value of an asset recorded in the accounts after deducting depreciation from the original cost and all additions.  
 

What is meant by the accounting group?

The accounting group is a set of documents and papers in which various financial transactions are recorded and forms the basis for financial reports.