Book value
Learn what book value means and how to calculate it for your business.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Book value is the net worth of a company or asset as recorded on the balance sheet, calculated by subtracting total liabilities from total assets.
- You can calculate book value for your whole business or for individual assets like equipment, vehicles and machinery.
- Book value differs from market value because it's based on historical costs recorded in your accounts, not what a buyer might actually pay today.
- Tracking your book value helps you understand your business's financial health and can inform decisions around selling, investing or borrowing.
What is book value?
Book value is the net value of a company or asset as recorded on the balance sheet. For a company, it's calculated by subtracting total liabilities from total assets.
Think of book value as what your business is worth on paper. If you added up everything your business owns (assets) and subtracted everything it owes (liabilities), the number you're left with is your book value, also known as your net worth. It's sometimes called net asset value or owner's equity.
For individual assets like equipment or vehicles, book value represents the original purchase price minus any depreciation that's been recorded over time. This gives you the current value of that asset according to your accounts.
How to calculate book value
There are 2 common ways to calculate book value, depending on whether you're looking at your whole business or a single asset. Both methods use figures you'll find on your balance sheet.
Book value of a company
To calculate the book value of your company, subtract your total liabilities from your total assets.
Book value = Total assets - Total liabilities
For example, Joe's Plumbing Ltd has $2 million in assets and $500,000 in liabilities. The company's book value is $2,000,000 - $500,000 = $1,500,000. This means if Joe sold all his assets and paid off all his debts, he'd have $1.5 million left over.
Some calculations also subtract intangible assets (like trademarks or goodwill) from the total to give a more conservative figure. This is known as tangible book value.
Book value of an asset
To calculate the book value of a single asset, subtract the accumulated depreciation from its original cost. If you've made improvements to the asset, add those costs to the original price first.
Book value of an asset = Original cost - Accumulated depreciation
For example, The Cake Company bought a box-making machine for $11,000. After 5 years of straight-line depreciation at $1,000 per year, the accumulated depreciation is $5,000. The machine's book value is now $11,000 - $5,000 = $6,000.
Book value per share (BVPS)
Book value per share (BVPS) tells you how much of a company's net assets each share represents. Investors use it to gauge whether a stock is fairly priced relative to the value of the company's underlying assets.
BVPS = Total shareholders' equity / Total outstanding shares
For example, if a company has $10 million in shareholders' equity and 2 million shares outstanding, the BVPS is $10,000,000 / 2,000,000 = $5. This means each share is backed by $5 worth of net assets on the balance sheet.
Investors compare BVPS to the current share price to help decide whether a stock might be undervalued or overvalued. A share price that's well below the BVPS could signal a potential bargain, though it's worth investigating why the market is pricing it that way.
Book value vs market value
Book value and market value measure 2 different things. Book value is what your business is worth based on the numbers in your accounts. Market value is what someone would actually pay for your business or its assets on the open market.
Market value is influenced by factors outside your financial records, such as supply and demand, brand reputation, growth potential and economic conditions. These factors can push market value well above or below book value.
Market value often exceeds book value for growing businesses, especially those with strong brands or intellectual property. A tech company's market value might be several times its book value because investors are paying for future earnings potential, not just the assets on the balance sheet.
Book value can exceed market value when a business is struggling, when market sentiment is negative, or when assets haven't been revalued to reflect current conditions. For buyers, this can represent an opportunity to acquire assets for less than their recorded worth.
Price-to-book (P/B) ratio
The price-to-book (P/B) ratio compares a company's market price to its book value per share. It's a quick way for investors to see how much they're paying relative to the company's net assets.
P/B ratio = Market price per share / Book value per share
Here's how to interpret the result:
- P/B below 1: The stock is trading for less than the company's net assets. This could mean the stock is undervalued, or it could signal that the market expects the company's assets to decline in value.
- P/B equal to 1: The stock price matches the company's book value per share. The market is valuing the company at roughly what its assets are worth on paper.
- P/B above 1: Investors are paying more than the book value of the company's net assets. This is common for profitable, growing companies where the market is pricing in future earnings and intangible value.
A "good" P/B ratio depends on the industry. Capital-heavy industries like manufacturing tend to have lower P/B ratios, while technology and service companies often trade at much higher multiples.
Limitations of book value
While book value is a useful measure of financial health, it doesn't always tell the full story. There are several reasons it can be misleading on its own.
- Historical cost basis: Book value is based on what you originally paid for your assets, not what they're worth today. Property, for example, may have appreciated significantly since you bought it, but your balance sheet won't reflect that increase.
- Intangible assets are often excluded: Things like your brand reputation, customer relationships and proprietary knowledge can be extremely valuable but rarely appear on the balance sheet at their true worth. Similarly, amortisation of intangible assets like patents and trademarks may not capture their real value to the business.
- Depreciation may not reflect reality:Depreciation is calculated using standardised methods, which don't always match how quickly an asset actually loses value. A well-maintained vehicle might be worth more than its depreciated book value suggests.
- Less useful for service businesses: Companies that rely on people and expertise rather than physical assets tend to have low book values that don't reflect their true earning potential.
For these reasons, it's best to use book value alongside other financial metrics rather than relying on it in isolation.
Why book value matters for your small business
Even if you're not planning to sell your business or attract investors, knowing your book value gives you a clearer picture of where you stand financially.
Understanding your net worth: Your book value is essentially your business's net worth. Tracking it over time shows you whether your business is building value or losing ground. A rising book value means your assets are growing faster than your liabilities.
Informing big decisions: If you're considering selling your business, taking on a partner or applying for a loan, your book value is one of the first numbers a buyer, investor or lender will look at. It provides a baseline for negotiations.
Benchmarking your financial health: Comparing your book value year on year helps you spot trends and identify potential issues early. If your book value is declining, it might be time to review your spending, debt levels or asset management strategy.
Simplify your financial reporting with Xero
Calculating your book value starts with having accurate, up-to-date financial records. Xero's accounting software makes it easy to track your assets, liabilities and equity in one place, so you can see where your business stands.
With Xero, you can run balance sheet reports quickly, track asset depreciation and keep your books organised without the manual admin. Whether you're preparing for tax time, planning a sale or simply keeping on top of your finances, Xero gives you the clarity you need to make confident decisions. Get one month free.
FAQs on book value
Here are some frequently asked questions about book value.
Can a company's book value be negative?
Yes, a company's book value can be negative if its total liabilities exceed its total assets. This can happen when a business takes on significant debt or accumulates losses over time.
Is a higher book value always better?
Not necessarily. A higher book value means your assets outweigh your liabilities by a larger margin, which is generally positive. However, it doesn't account for factors like asset quality, earning potential or market conditions.
What is a good price-to-book ratio?
There's no single "good" P/B ratio because it varies by industry. A P/B ratio below 1 may suggest a stock is undervalued, but it could also indicate underlying problems with the business.
Why is market value often higher than book value?
Market value factors in things that don't appear on the balance sheet, such as brand strength, growth potential and intellectual property. Investors are often willing to pay more than the recorded asset value because they expect future returns.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.