Book value
Learn what book value is, how to calculate it for your company and assets, and how it differs from market value.
Published Friday 24 July 2026
Table of contents
Key takeaways
- Book value is a company's net worth, or an asset's carrying value on the balance sheet: total assets minus total liabilities.
- Comparing book value to market value shows whether a business or investment looks undervalued or overvalued.
- Book value per share (BVPS) and the price-to-book (P/B) ratio help you assess your company's position and attract investors.
- Book value relies on historical costs and misses intangibles like brand and customer relationships, so pair it with other metrics.
What is book value?
Book value is an accounting measure of the net worth of a business, or the recorded value of an asset on the balance sheet. It gives you a snapshot of what your company or its assets are theoretically worth based on your financial records.
The term applies at two levels: the whole business and a single asset. The sections below explain both.
Book value of a business
For a business, book value equals total assets minus total liabilities. This figure is sometimes called net book value, shareholders' equity, or net asset value.
It's the amount shareholders would theoretically receive if the company sold every asset and paid off every debt, so it reflects the owners' stake left in the business. If you're looking to sell or bring in outside investors, book value gives you a baseline figure for negotiations.
Book value of an asset
For an individual asset, book value is the original purchase price minus any accumulated depreciation or amortisation. Tangible assets like equipment, vehicles, and machinery lose value over time through depreciation, while intangible assets like trademarks and patents decrease in value through amortisation.
The book value of an asset shows its carrying value on your balance sheet, not necessarily what you could sell it for today. That distinction matters when you assess the true worth of your business property.
Book value formula
The formula for book value depends on whether you're calculating it for a company or an individual asset. Here are the two core formulas you'll use.
Company book value formula
To find the book value of your company, use this formula:
Book value = total assets − total liabilities
Total assets include everything your business owns: cash, accounts receivable, inventory, equipment, property, and investments. Total liabilities include everything you owe: loans, accounts payable, mortgages, and other debts.
Asset book value formula
To find the book value of a specific asset, use this formula:
Book value of asset = original cost − accumulated depreciation
If you've made improvements to the asset, add those costs to the original purchase price before subtracting depreciation. This gives you the net carrying value on your balance sheet.
How to calculate book value of a company
Calculating book value for your company is straightforward once you have your balance sheet figures. Here's a worked example.
Say you run a plumbing business, and your balance sheet shows the following:
- Total assets: HK$2,000,000 (including cash, equipment, vehicles, and accounts receivable)
- Total liabilities: HK$500,000 (including business loans and accounts payable)
Your company's book value is HK$2,000,000 − HK$500,000 = HK$1,500,000. If your business sold every asset and paid off every debt, HK$1,500,000 would remain for the owners.
A more detailed calculation might also subtract intangible assets like goodwill. If HK$200,000 of those total assets are intangible, tangible book value would be HK$2,000,000 − HK$200,000 − HK$500,000 = HK$1,300,000. Tangible book value is a more conservative measure, because intangible assets can be difficult to sell on their own.
How to calculate book value of an asset
Individual assets lose value over time through depreciation, and book value tracks that decline on your balance sheet. Here's how it works with an example.
Suppose your bakery bought an industrial oven for HK$110,000. You use straight-line depreciation with a useful life of 10 years, which means the oven depreciates by HK$11,000 per year.
After five years, the accumulated depreciation is HK$55,000. The oven's book value is now HK$110,000 − HK$55,000 = HK$55,000. That's the value recorded on your balance sheet, even though the oven might sell for more or less on the open market.
If you spent HK$20,000 upgrading the oven in year three, you'd add that to the original cost, since the upgrade counts as longer-term spending on the asset. The adjusted calculation becomes (HK$110,000 + HK$20,000) − HK$55,000 = HK$75,000. Improvements extend or enhance an asset's value, so they're added to the cost basis before depreciation is subtracted.
What changes book value over time?
Book value shifts as your business earns money, spends it, and finances its operations. These common events move it up or down:
- retaining profits, which increases equity and book value
- issuing new shares, which raises equity
- paying dividends, which reduces retained earnings
- recording depreciation and amortisation, which lowers asset values
- writing down or revaluing assets, which adjusts their carrying value
- taking on new debt, which increases liabilities
Book value vs market value
Book value and market value measure a company's worth in different ways. Understanding the gap between them helps you make better financial decisions.
What's the difference?
Book value is based on your accounting records, so it reflects historical costs minus depreciation and liabilities. Market value is what buyers are willing to pay for your business or assets right now, and factors like supply and demand, industry trends, and economic conditions all influence it.
For small businesses, market value often considers factors that never appear on the balance sheet. A loyal customer base, a strong local reputation, and recurring revenue can all push market value well above book value.
When they diverge
A company's market value frequently differs from its book value. When market value is higher, it usually signals that investors see growth potential, strong management, or valuable intangibles that the accounting records miss.
When market value falls below book value, the business may be undervalued, or the market may expect future challenges. If you're exploring a sale, understanding this gap helps you set realistic expectations and negotiate from an informed position.
Book value per share
Book value per share (BVPS) breaks a company's book value down on a per-share basis. It makes comparing companies of different sizes much easier.
BVPS formula
The formula for book value per share is:
BVPS = (total assets − total liabilities) / total outstanding shares
This tells you how much of the company's net assets each share represents. It's a useful baseline for judging whether a stock trades above or below its accounting value.
BVPS example
Suppose your company has HK$5,000,000 in total assets, HK$2,000,000 in total liabilities, and 100,000 outstanding shares. The book value per share is (HK$5,000,000 − HK$2,000,000) / 100,000 = HK$30 per share.
If the current share price is HK$45, the stock trades above book value, suggesting investors value future earnings beyond net assets. If the share price is HK$20, it trades below book value, which could point to an undervalued opportunity or underlying concerns.
Price-to-book (P/B) ratio
The price-to-book ratio compares a company's market price to its book value. It gives you a quick way to gauge whether a stock might be overvalued or undervalued.
P/B ratio formula
The formula for the price-to-book ratio is:
P/B ratio = market price per share / book value per share
Using the earlier example where BVPS is HK$30 and the share price is HK$45, the P/B ratio is HK$45 / HK$30 = 1.5. Investors are paying HK$1.50 for every HK$1 of book value.
How to interpret the P/B ratio
A P/B ratio below 1.0 might suggest a stock is undervalued, meaning the market prices it below its net asset value. It could also signal that the market expects declining performance.
A P/B ratio above 1.0 shows the market values the company above its accounting worth, which is common for businesses with strong growth prospects or valuable intellectual property. P/B ratios vary widely by industry, so compare within your sector rather than across all industries.
Why book value matters for your small business
Book value plays a practical role in several decisions you'll face as a business owner. Here's how it can help your business:
- Assess your company's financial health by comparing total assets to total liabilities over time
- Set a starting point for negotiations when selling your business or bringing in investors
- Track how your assets depreciate so you can plan for replacements and upgrades
- Understand your debt position by seeing how much equity remains after liabilities
- Support loan applications, since lenders often review book value when you seek funding to grow
Keeping your balance sheet accurate and up to date makes these calculations reliable. Cloud accounting software can help by tracking asset values, recording depreciation, and producing reports you can read at a glance whenever you need them.
Limitations of book value
Book value is a helpful metric, though it comes with some drawbacks worth keeping in mind. Book value has the following key limitations:
- It relies on historical costs, which may not reflect what assets are worth today
- It doesn't capture intangible assets like brand reputation, customer loyalty, or proprietary processes
- Depreciation methods vary, so two companies with identical assets could report different book values
- It provides a static snapshot rather than a forward-looking view of your earning potential
- It can understate the worth of knowledge-based or service businesses where physical assets are minimal
Because of these limitations, use book value alongside other measures like the money moving in and out of your business, revenue growth, and profitability. Together, they give you a fuller picture of your business's true worth.
Simplify your financial reporting with Xero
Understanding your book value starts with accurate, up-to-date financial records. Xero's cloud accounting software helps you track your assets, liabilities, and equity in one place, with automated bank feeds, real-time reporting, and customisable balance sheet reports so you can calculate your book value whenever you need it.
Whether you're preparing for a business valuation, applying for a loan, or simply want a clearer view of your finances, Xero helps you stay on top of the numbers that matter and get one month free.
FAQs on book value
Here are answers to some frequently asked questions about book value.
Can book value be negative?
Yes, a company has negative book value when its total liabilities exceed its total assets. This can happen during periods of heavy borrowing, sustained losses, or large write-downs.
How often should you calculate book value?
Review book value at least quarterly, when you prepare your financial statements. Calculating it monthly gives you a timelier view of your financial position.
Is a higher book value always better?
Not always. A high book value could mean the company holds many assets, but those assets might be outdated or hard to sell.
Is book value the same as shareholders' equity?
For a company, book value and shareholders' equity refer to the same figure: total assets minus total liabilities. The terms are used interchangeably, though book value can also describe the carrying value of a single asset.
How does goodwill affect book value?
Goodwill is an intangible asset that arises when a company buys another business for more than its net asset value. It raises total assets and book value, but it isn't a physical asset you can sell.
What's the difference between book value and carrying value?
In most contexts, book value and carrying value mean the same thing. Both refer to the value of an asset or company recorded on the balance sheet after depreciation or amortisation.
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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.