What is Book Value? Meaning, Formula & Its Use in Stock Valuation

Asset values are the combination of liabilities and equities. If we calculate the net value of a company’s assets by subtracting its liabilities, we will get the Book Value. It shows the company’s worth if it sold all its assets and paid off all its debts.

For example, if XYZ Ltd. owns assets worth ₹50,00,00,000 and has liabilities of ₹20,00,00,000, its book value is ₹30,00,00,000. If the company has 3,00,00,000 shares, the book value per share (BVPS) will be:
 

Even though the balance sheet showed ₹50,00,00,000 worth of assets, the net value that the company holds is no more than ₹30,00,00,000. Investors and lenders will acknowledge the book value and compare it with the market price of its shares. Let’s know more about book value and its use in stock valuation on this blog.

What is the Formula of Book Value and How is it Calculated?

Book Value tells us what goes to shareholders if all assets are sold and liabilities are cleared. It can be calculated in different ways depending on the situation. Let’s discuss it in this section.

1.  Basic Formula

The basic formula for book value is given by:

Book Value = Total Assets − Total Liabilities

This shows the company’s net worth from an accounting perspective.

For example, A company has ₹500,00,00,000 in total assets and ₹320,00,00,000 in total liabilities.

So, ₹500,00,00,000 − ₹320,00,00,000 = ₹180,00,00,000 (Book Value).

The company’s net worth is ₹180,00,00,000, meaning this is what shareholders own on paper.
 

2. Per-Share Metric (BVPS)
    

The formula for the per-share metric is:

BVPS = Shareholders’ Equity / Total Common Shares Outstanding

This shows how much book value belongs to each share.

For example, A firm has ₹210,00,00,000 in shareholders’ equity and 2,00,00,000 common shares.

₹210,00,00,000 ÷ 2,00,00,000 shares = ₹105 per share (BVPS).

This data means that each share represents ₹105 of accounting value, which can be compared with its market price.
 

3. Preferred Stock Adjustment (BVPS Detail)
    

Preferred Stock Adjustment means subtracting the value of preferred stock from total equity to find how much actually belongs to common shareholders.

The formula will be: BVPS = (Shareholders’ Equity − Preferred Stock) / Total Common Shares Outstanding.

For example, the same firm from the above example had ₹10,00,00,000 in preferred stock.

BVPS = (₹210,00,00,000 − ₹10,00,00,000) ÷ 2,00,00,000 shares 

          = ₹200,00,00,000 ÷ 2,00,00,000 = ₹100 per share.

Common shareholders effectively own ₹100 per share after accounting for preferred stock claims.
 

4. Tangible Book Value (Optional)
    

This excludes intangible items like goodwill or patents. It shows the value of only physical and financial assets.

For example, A company has assets of ₹500,00,00,000, liabilities of ₹320,00,00,000, and intangible assets of ₹50,00,00,000.
 

• Book Value = ₹500 − ₹320 = ₹180,00,00,000. 
   
• Tangible Book Value = ₹180 − ₹50 = ₹130,00,00,000.

If intangibles are excluded, shareholders would get only ₹130,00,00,000 in a liquidation scenario.
 

What is the Use of Book Value in Valuation?
 

Valuation tools such as the Price-to-Book (P/B) ratio and the Graham Number help investors check if a stock is cheap or expensive compared to its book value. Generally, value investors prefer stocks with a P/B ratio below 1, as it may indicate the stock is undervalued, which also gives them a buying opportunity.

1. Price-to-Book (P/B) Ratio
    

This ratio shows whether a company’s shares trade above or below their accounting value. A P/B under 1 often signals undervaluation.

Formula:

P/B = Market Price per Share / Book Value per Share

For example, A company’s market price is ₹90 per share, while its BVPS is ₹120 per share. Investors want to check if the stock is undervalued.

P/B = ₹90 ÷ ₹120 = 0.75.

Since the P/B ratio is below 1, the stock seems undervalued compared to its book value. If the value of the P/B ratio is more than one, then it would mean that the stock is overvalued. 
 

2. Graham Number (Value Investing)
    

The Graham Number shows the maximum price an investor should pay for a stock. It is calculated using a company’s earnings (EPS) and book value.

Formula:

Graham Number=(22.5×EPS×BVPS​)1/2

For example, A company reports EPS of ₹20 and BVPS of ₹150. Investors use this to see if the stock is priced fairly.

Graham Number = √(22.5 × 20 × 150) = √67,500 = ₹260.

This means that if the stock trades below ₹260, it is considered a safe and fair investment.
 

Berkshire Hathaway Case

Berkshire Hathaway is currently trading at approximately 1.6 times its book value. This means that investors pay about 60% more than the net asset value per share. This is its highest P/B level in six years. It is possible only because of consistent earnings growth and stock buybacks. 

The P/B > 1 shows that investors value Berkshire’s future potential and strength more than its net asset value. This extra value shows their trust in the company’s future growth and management.

Strengths & Limitations of Book Value

Let’s look at a few advantages and disadvantages of book value. We have backed each of the points by stating real data.

Book value helps find undervalued companies with lots of physical assets, like banks. But for digital businesses, it is not of much use.

Conclusion

Book value measures the company’s worth after it sells all its assets andclearsr off all its debts. It is extremely useful in firms where physical assets are used. For a firm with intangible assets, book value is not the right tool to measure the company’s worth. 

Frequently Asked Questions

How is book value treated in mergers & acquisitions (purchase price allocation)?
In M&A, the acquirer revalues identifiable assets to fair value and recognises goodwill for the residual purchase price.

What’s the difference between book value and tax basis?
Book value follows accounting rules; tax basis follows tax law. Timing differences create deferred tax impacts on equity.

How does inflation affect book value?
Historical-cost book value can understate real value in inflationary periods; replacement-cost or revaluation methods provide more realistic measures.

Can lenders rely on book value for loan covenants?
Yes, lenders use book-value ratios (equity, loan-to-book), but often require market-adjusted covenants for accuracy and risk control.

How do goodwill impairments change book value?
An impairment write-down reduces carrying goodwill and shareholders’ equity, directly lowering the company’s book value.

Does asset revaluation change reported book value?
Under revaluation models (allowed in IFRS), assets are restated to fair value, increasing or decreasing book value and equity.

How do deferred tax items interact with book value?
Temporary differences between accounting and tax values create deferred tax assets/liabilities, which adjust net assets and the book value.

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