What is book value?

When analyzing a business, book value helps you understand its actual financial position, stripped of market hype or investor sentiment. Investors use it to spot undervalued stocks. Business owners use it to track equity growth and asset strength over time.

Understanding book value

Book value gives you a baseline view of what a company is worth. To understand how it’s built, it helps to break down its core components. The most common inputs include:

• Tangible assets: These are physical items the company owns, such as machinery, equipment, buildings, and inventory. They appear on the balance sheet at their historical cost, adjusted for depreciation.
• Liabilities: This includes outstanding debts, accounts payable, and other financial obligations that are due and payable. Liabilities are subtracted from assets to arrive at book value.
• Shareholders’ equity: This reflects what’s left for owners after liabilities are paid. It includes items like retained earnings (profits kept in the business) and additional paid-in capital.

Book value typically does not include intangible assets, such as brand reputation or proprietary algorithms, unless they were acquired and recorded during a merger. For example, if a company’s book value is $500 million and its market value is $300 million, it may suggest undervaluation.

But that doesn’t always mean it’s a good investment. Some industries naturally operate with lower book values because they rely less on physical assets. That’s why companies in tech, media, or SaaS often show a low book value despite high market valuations.

If your team tracks assets and liabilities manually, it’s easy to miss updates or misclassify capital expenses. Ramp automates this by detecting patterns in how purchases are recorded and suggesting the correct accounting treatment in real-time.

For example, if a laptop purchase should be capitalized but is coded as an expense, Ramp flags the error and recommends a fix. This ensures that assets are recorded accurately and the book value accurately reflects the true net worth.

Book value vs. market value

The biggest difference between book value and market value is what they are based on. Book value looks backward and is rooted in what the company has already earned and owns. Market value looks forward, shaped by what investors think the company will achieve.

The gap between the two can be wide. For example, as of 2023, Apple’s book value was around $66.8 billion, while its market value exceeded $2.9 trillion.

If the market value drops below the book value, some investors view it as a buying opportunity, assuming the company remains financially healthy. But that’s not always the case.

A low price-to-book ratio can signal deeper issues, such as poor future earnings potential, declining cash flow, outdated or overstated assets, or legal and regulatory risks that haven’t yet affected the financials. In these cases, the market may be pricing in problems the balance sheet doesn’t capture.

How book value is calculated

A company’s accounting team calculates book value as part of its regular financial reporting process. You will typically see it updated every quarter when companies release their quarterly financial statements, also known as balance sheets. For public companies, this data appears in 10-Q and 10-K filings and reflects the company’s net worth at a specific point in time.

Here’s how you can calculate it yourself using the company’s balance sheet:

• Step 1: Locate total assets. Go to the company’s latest balance sheet. Find the line item labeled “Total Assets.” This includes everything the company owns, including cash, inventory, equipment, real estate, and long-term investments. Use the most recent figures available.
• Step 2: Find total liabilities. On the same balance sheet, look for “Total Liabilities.” This includes short-term debt(like accounts payable or taxes owed) and long-term obligations (like bonds, leases, or pension liabilities). These are the company’s financial responsibilities.
• Step 3: Subtract liabilities from assets. To calculate book value, you should subtract the total liabilities from the total assets of the company. The result is the company’s net worth, as reported in its financial statements. This is also known as shareholders’ equity.
• Step 4: Adjust for preferred stock. If the company has issued preferred stock, you’ll need to subtract the value of that stock from total shareholders’ equity. This gives you the book value that belongs to common shareholders. Preferred shareholders have a higher claim on assets, so their portion is excluded when calculating equity available to common stockholders.
• Step 5: Review for one-time adjustments. Some companies carry goodwill, intangible assets, or write-downs that may distort book value. Review the notes to financial statements to check if major adjustments have impacted the final number.

Once you know the book value, you can compare it to the market value or use it to calculate key ratios, such as the price-to-book ratio. It helps you understand how much value a company has built over time.

Where to find book value on financial statements

You can find book value on a company’s balance sheet, listed under the Shareholders’ Equity section. This is typically located at the bottom of the balance sheet after total assets and total liabilities have been listed.

To locate it, start by reviewing the company’s latest financial statements. In most balance sheets, book value appears as “total shareholders’equity” or “total stockholders’ equity,” as these two terms are used interchangeably.

This total is made up of several key line items, including:

• Common stock
• Additional paid-in capital
• Retained earnings
• Treasury stock (a negative value)

These amounts are either added to or subtracted from the total equity. If the company has issued preferred stock, it'll usually be listed separately. In that case, you will need to subtract it to calculate the book value for common shareholders.

Here’s a simplified version of what this might look like on a balance sheet:

Shareholders’ Equity

Common Stock...........................$10,000,000

Additional Paid-in Capital..........$50,000,000

Retained Earnings......................$40,000,000

Treasury Stock...........................($5,000,000)

Total Shareholders’ Equity.........$95,000,000

Key ratios involving book value

Book value becomes more useful when you connect it to other financial metrics. Investors and analysts often use it to calculate valuation and performance ratios that reveal how efficiently a company is using its equity and whether its stock price reflects real underlying value.

Price-to-book (P/B) ratio

The price-to-book (P/B) ratio compares a company’s market value to its book value. It helps you see how the market is valuing the company relative to its worth on paper. To calculate the P/B ratio, you can follow the formula:

P/B ratio = Share price ÷ Book value per share

A P/B ratio of 1 means the stock is trading at exactly its book value. A ratio below 1 may signal undervaluation, while a ratio above 1 suggests the market expects future growth, brand value, or strong profitability that isn’t reflected in the balance sheet.

For example, Meta Platforms has consistently traded at a P/B ratio well above 4, despite having relatively low tangible assets. That’s because investors place a high premium on its data assets, ad network reach, and long-term earnings potential—none of which are fully captured in book value.

P/B is especially useful when comparing companies in asset-intensive industries, such as banking, insurance, and manufacturing. In these sectors, book value tends to reflect real economic worth more closely. For tech or service firms, high P/B ratios are common because their value often lies in intangible assets that don’t appear on the balance sheet.

Return on equity (ROE)

Return on equity (ROE) measures how effectively a company uses its book value to generate profits. It tells you how much net income is earned for every dollar of shareholders’ equity. The higher the ROE, the more efficiently the company is turning equity into earnings. To calculate ROE use the formula:

ROE = Net income ÷ Shareholders’ equity

You’ll find both numbers on the income statement and balance sheet. Use figures from the same reporting period to keep the calculation accurate.

The average ROE for S&P 500 companies was about 17.24%, though this varies widely by industry. Banks and financial firms often report higher ROEs because they use leverage to increase returns. In contrast, capital-intensive sectors, such as utilities, tend to exhibit lower ROE due to their larger equity bases.

ROE is most useful when you are comparing companies in the same industry or tracking performance over time. A rising ROE can signal stronger profitability or better asset management. If the ROE is high but the book value remains flat, it may suggest that the company is over-relying on debt or not reinvesting its earnings.

Because ROE depends on both accurate net income and up-to-date equity, clean data is essential. Ramp connects expense management and accounting in one system, so changes to spending or reimbursements flow directly into your books.

You don’t need to wait until the end of the month to see how equity is shifting. This helps finance teams calculate ratios like ROE with current data, making it easier to monitor profitability in real-time.

How book value brings balance sheet clarity

Book value gives you a grounded way to understand what a company actually owns, what it owes, and what’s left for shareholders. It strips away market noise and focuses on real financial position, using numbers you can verify on the balance sheet.

While it may not capture future growth or brand value, it remains a reliable measure of a company’s core worth. This is especially true in capital-heavy industries or when comparing equity over time.

Tools like Ramp bring that clarity into your accounting workflow. By automating transaction coding, flagging misclassified purchases, and keeping your books synced with real-time activity, Ramp ensures your balance sheet reflects what’s actually happening inside the business. That makes it easier to trust your equity numbers, run accurate reports, and spot risks before they escalate.

FAQ

Can book value be negative?

Book value becomes negative when a company’s total liabilities exceed its total assets. This usually signals ongoing losses, large write-downs, or excessive debt. If the business were liquidated in this state, shareholders would likely receive nothing, since debts outweigh assets.

What is tangible book value?

Tangible book value removes intangible assets like goodwill, patents, and trademarks from the standard book value calculation. It reflects the value of a company’s physical assets after liabilities are paid. This metric is often used in asset-heavy industries where real property holds more weight than brand or IP.

How do share buybacks affect book value per share (BVPS)?

Buybacks reduce both total equity and the number of outstanding shares. If equity declines faster than the share count, BVPS can fall, even if the business remains profitable. This can inflate the price-to-book ratio and make the stock appear more expensive relative to its book value, even when fundamentals haven’t changed.

Does inflation distort book value?

Book value is based on historical cost and not on current market prices. In high-inflation environments, older assets can appear undervalued on the balance sheet, making book value less reflective of real economic worth.