Book value
Learn what book value is, how to calculate it, and how it compares with market and liquidation value.
Published Monday 17 August 2026
Table of contents
Key takeaways
- Book value is the net worth of a company, or the carrying value of an asset, worked out by subtracting what you owe from what you own.
- Comparing book value with 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 gauge your financial position and show it to investors.
- Book value relies on historical costs and leaves out intangibles like brand reputation, so use it alongside other measures.
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 worth on paper, based on your financial records rather than what a buyer might pay today.
Book value of a business
For a business, book value equals total assets minus total liabilities. You'll also see it called net book value, shareholders' equity, or net asset value. It represents the amount shareholders would receive, in theory, if the company sold everything it owns and paid off everything it owes.
Owners and investors lean on book value during sales, mergers, and investment decisions. If you're bringing in outside investors or planning an exit, it gives you a baseline figure to negotiate from.
Book value of an asset
For a single asset, book value is the original purchase price minus any accumulated depreciation or amortisation. Tangible assets such as equipment, vehicles, and machinery lose value over time through depreciation, while intangible assets such as trademarks and patents reduce in value through amortisation.
The book value of an asset is its carrying value on your balance sheet, not necessarily what you could sell it for today. That distinction matters when you're weighing up the real worth of your business property.
What makes up book value
Book value comes straight from your balance sheet: total assets minus total liabilities. On the equity side, that net figure is built from a few recognisable parts you can point to in your own accounts.
- Share capital: the money owners or shareholders have put into the business in exchange for shares
- Retained earnings and reserves: the profits the business has kept rather than paid out
- Treasury shares: any shares the company has bought back, which reduce the total
Add share capital to retained earnings, subtract any treasury shares, and you arrive at the same equity figure that book value describes. Seeing these parts makes it clearer why two businesses of a similar size can still report very different book values.
Book value formula
The formula for book value depends on whether you're working it out for a whole company or a single 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 cover everything your business owns: cash, accounts receivable, inventory, equipment, property, and investments. Total liabilities cover everything you owe, such as 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 improved the asset, add those costs to the original purchase price before subtracting depreciation. That gives you the net carrying value on your balance sheet.
How to calculate book value of a company
Once you have your balance sheet figures, calculating book value for your company is straightforward. Here's a worked example.
Say you run a plumbing business. Your balance sheet shows the following:
- Total assets: €2,000,000 (including cash, equipment, vehicles, and accounts receivable)
- Total liabilities: €500,000 (including business loans and accounts payable)
Your company's book value is €2,000,000 − €500,000 = €1,500,000. So if your business sold every asset and paid off every debt, €1,500,000 would remain for the owners.
A more detailed calculation also subtracts intangible assets like goodwill. If €200,000 of those assets are intangible, tangible book value would be €2,000,000 − €200,000 − €500,000 = €1,300,000. Tangible book value is a more conservative measure, because intangible assets can be hard 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 €11,000. You use straight-line depreciation over a useful life of 10 years, so the oven depreciates by €1,100 a year.
After five years, the accumulated depreciation is €5,500. The oven's book value is now €11,000 − €5,500 = €5,500. 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 €2,000 upgrading the oven in year three, you'd add that to the original cost. The adjusted calculation becomes (€11,000 + €2,000) − €5,500 = €7,500. Improvements add to an asset's value, so they go onto the cost basis before depreciation is subtracted.
Book value versus market value
Book value and market value measure a company's worth in different ways, and understanding the gap between them helps you make better financial decisions.
What's the difference?
Book value comes from your accounting records: historical costs minus depreciation and liabilities. Market value is what buyers are actually willing to pay for your business or assets right now, shaped by supply and demand, industry trends, and economic conditions.
For small businesses, market value often reflects things 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
Market value usually differs from book value, and the direction tells you something. When market value sits above book value, it typically signals that buyers see growth potential, strong management, or valuable intangibles that the accounts don't capture. The more promising those prospects, the wider the gap tends to be.
When market value falls below book value, it can mean the business is undervalued or that the market expects tougher times ahead. As the outlook weakens, the two figures tend to move closer together. For an owner exploring a sale, reading this gap helps you set realistic expectations and negotiate from an informed position.
Book value versus liquidation value
Book value and liquidation value both describe what's left for owners after debts, but they assume very different circumstances. Book value assumes the business keeps trading, while liquidation value assumes you sell everything off, often quickly.
Because a forced sale rarely fetches full price, liquidation value is usually lower than book value. Specialist equipment, part-finished stock, and intangibles can sell for far less than their carrying value when a business is wound down. Book value is the better guide for a company that keeps operating; liquidation value is the one lenders and buyers look at when a business is closing.
Book value per share
Book value per share (BVPS) breaks a company's book value down to a per-share figure, which makes it easier to compare businesses of different sizes.
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 share trades above or below its accounting value.
BVPS example
Suppose your company has €5,000,000 in total assets, €2,000,000 in total liabilities, and 100,000 outstanding shares. The book value per share is (€5,000,000 − €2,000,000) / 100,000 = €30 a share.
If the current share price is €45, the share trades above book value, which suggests investors value the company's future earnings beyond its net assets. If the price is €20, it trades below book value, which could point to an undervalued opportunity or to underlying concerns.
Price-to-book (P/B) ratio
The price-to-book ratio compares a company's market price with its book value, giving you a quick read on whether a share 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 €30 and the share price is €45, the P/B ratio is €45 / €30 = 1.5. So investors are paying €1.50 for every €1 of book value.
How to interpret the P/B ratio
A P/B ratio of 1.0 means the market values the company at exactly its book value. A ratio below 1.0 can suggest a share is undervalued, priced below its net asset value, though it can also signal that the market expects performance to decline.
A P/B ratio above 1.0 means 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 a lot by industry, so compare within your sector rather than across all of them.
Why book value matters for your small business
Book value is more than an accounting concept. It plays a practical role in several decisions you'll face as an owner, and it's worth reviewing regularly, at least each quarter when you prepare your financial statements.
Here's how book value can help your business:
- Assess your financial health by tracking total assets against total liabilities over time
- Set a starting point for negotiations when you sell the business or bring in investors
- Benchmark your position against similar businesses in your sector
- Plan for replacements and upgrades by tracking how your assets depreciate
- Support loan applications, since lenders often review book value when weighing up creditworthiness
Keeping your balance sheet accurate makes these calculations reliable. Cloud accounting software can help by tracking asset values, recording depreciation, and generating balance sheet reports whenever you need them.
Limitations of book value
Book value is a helpful metric, but it has real drawbacks worth keeping in mind. A high figure isn't automatically good, either, since the assets behind it might be hard to sell.
Book value has these key limitations:
- It relies on historical costs, which may not reflect what assets are worth today
- It leaves out intangible assets like brand reputation, customer loyalty, and know-how
- It can include fully depreciated assets that still work, understating what you actually own
- It can miss off-balance-sheet items and unrecorded intangibles that affect real worth
- It gives a static snapshot rather than a forward-looking view of earning potential
Because of these limits, use book value alongside other measures such as cash flow, revenue growth, and profitability. Together they give you a fuller picture of what your business is really worth.
Simplify your financial reporting with Xero
Understanding your book value starts with accurate, up-to-date 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 work out your book value whenever you need it.
Whether you're preparing for a business valuation, applying for a loan, or just want a clearer view of your finances, Xero helps you stay on top of the numbers that matter, and you can get one month free when you sign up.
FAQs on book value
Here are answers to some common questions about book value.
Can book value be negative?
Yes. Book value is negative when total liabilities exceed total assets, which can happen after heavy borrowing, sustained losses, or large write-downs.
Why is it called book value?
The name comes from the accounting books, the financial records where a company logs its assets and liabilities. Book value is the worth shown in those records, as opposed to the market price.
How is book value different from liquidation value?
Book value assumes the business keeps trading, while liquidation value is what you'd get from selling everything off, usually in a hurry. Liquidation value is typically the lower of the two.
Why is market value often higher than book value?
Market value reflects future earnings and intangibles like brand and customer loyalty that the accounts leave out. When buyers expect growth, they'll pay more than the recorded book value.
How does goodwill affect book value?
Goodwill is an intangible asset recorded when a company buys another business for more than its net asset value. It raises total assets and so lifts book value, but it isn't a sellable physical asset.
What's the difference between book value and carrying value?
In most cases they mean the same thing. Both describe the value of an asset or company as 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.