Book value is the value recorded in the accounts rather than the price the market would necessarily pay today. For a firm as a whole, book value is often discussed as total assets minus total liabilities.
How it is calculated
At the company level:
Book value of equity = total assets - total liabilities
On a per-share basis:
Book value per share = common equity / shares outstanding
The measure is built from accounting rules, historical cost, depreciation, write-downs, and other reporting conventions. That is why it can differ sharply from market value.
Why the gap with market value matters
Book value is backward looking. Market value is forward looking. A firm’s shares may trade above book value if investors expect strong future profits, or below book value if they believe assets are overstated or returns will be weak.
The gap is especially important when:
- assets are mostly intangible,
- accounting values are stale,
- the firm is distressed,
- investors use price-to-book ratios in valuation screens.
Economic use
Book value is useful because it provides a standardized accounting anchor. But it is not a complete estimate of economic worth. Analysts use it alongside profitability, cash flow, leverage, and market expectations rather than as a standalone truth.