Book value

In detail

Book value is the accounting value of shareholders' equity: total assets minus total liabilities. Divided by shares outstanding it gives book value per share, and comparing that to the share price gives the price-to-book (P/B) ratio. It is most useful where the balance sheet genuinely reflects what a business is worth — banks, insurers, and asset-heavy industrials, where the assets are financial instruments or physical property carried at something close to a real value. For those, P/B is a meaningful valuation anchor. It is close to useless for businesses whose value is intangible. Accounting rules require most internally generated intangibles — brands, software built in-house, research, customer relationships — to be expensed as incurred rather than capitalized, so they never appear as assets. A software company with a trivial balance sheet and enormous earning power will show a very high P/B, and that says nothing about whether it is expensive. Book value is also backward-looking: it records historical cost, not current worth, so it can substantially overstate assets a company would struggle to sell.