What is Book Value?
Book value is the accounting value of a company — what shareholders would theoretically receive if the company were liquidated today and all assets sold and liabilities paid. It equals:
- Book Value = Total Assets − Total Liabilities
- Book Value Per Share (BVPS) = Book Value / Shares Outstanding
Example: If a company has ₹1,000 crore in assets, ₹400 crore in liabilities, and 10 crore shares outstanding — Book Value = ₹600 crore; BVPS = ₹60 per share.
Book value is essentially the shareholders' equity on the balance sheet, also called Net Worth in Indian accounting terminology.
Price-to-Book Ratio (P/B)
P/B = Market Price Per Share / Book Value Per Share
- P/B < 1: Stock trades below book value — implies market expects losses, or assets are overstated, or the business is deeply undervalued. Common in PSU banks, steel companies during downturns.
- P/B = 1: Stock trades at book value — market values the company exactly at its net assets.
- P/B > 1: Market assigns a premium for brand value, earnings power, or growth — the normal state for quality businesses.
- P/B 5–30×: Normal for quality consumer companies, IT firms with intangible assets (software, brands) not fully captured on balance sheet.
When P/B is Most Useful
P/B is most relevant for asset-heavy, balance-sheet-driven businesses:
- Banks and NBFCs: Book value represents loan portfolio net of NPAs. ROE/P/B framework is the standard bank valuation methodology. Price / Adjusted Book = Price / (Equity − Gross NPA × (1 − provision coverage))
- Manufacturing companies: Large fixed assets (plant, machinery, land) are central to the business
- Real estate companies: Land bank and property inventory are key assets
When P/B is Less Useful
For asset-light businesses, book value is a poor indicator of true value:
- IT companies (TCS, Infosys): Their main asset is human capital — not on the balance sheet
- Consumer brands (HUL, Asian Paints): Brand value worth thousands of crores doesn't appear on the balance sheet
- Platform businesses: Network effects and user bases have immense value not captured in book value
These companies routinely trade at P/B of 10–50× because earnings power far exceeds tangible asset value.
Tangible Book Value
Tangible Book Value = Book Value − Goodwill − Intangible Assets. Goodwill arises from acquisitions (you paid ₹500 crore for a business worth ₹200 crore on books → ₹300 crore goodwill). If goodwill needs to be written off (impaired), book value falls sharply. Always check goodwill as a percentage of total book value — very high goodwill means the acquisition premium may be at risk.