Book value
Learn what book value means, how to calculate it, and why it matters for your small business.
Published Monday 22 June 2026
Table of contents
Key takeaways
- Book value represents the net worth of a company or the carrying value of an asset on the balance sheet, calculated by subtracting liabilities from assets.
- Comparing book value to market value helps you understand whether a business or investment is potentially undervalued or overvalued.
- Book value per share (BVPS) and the price-to-book (P/B) ratio are practical tools for evaluating your company's financial position and attracting investors.
- While book value is a useful starting point, it has limitations because it relies on historical costs and doesn't capture intangible assets like brand reputation or customer relationships.
What is book value?
Book value is an accounting measure that reflects 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.
Book value of a business
For a business, book value equals total assets minus total liabilities. This is sometimes called net book value, shareholders' equity, or net asset value. It represents the amount that shareholders would theoretically receive if the company sold all its assets and paid off all its debts.
Business owners and investors commonly use book value during sales, mergers, or investment decisions. If you're looking to sell your business or bring in outside investors, book value provides 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 amortization. Tangible assets like equipment, vehicles, and machinery lose value over time through depreciation. Intangible assets like trademarks and patents decrease in value through amortization.
The book value of an asset reflects its carrying value on your balance sheet, not necessarily what you could sell it for today. This distinction matters when you're assessing 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 2 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 step-by-step 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. This means that if your business sold every asset and paid off every debt, $1,500,000 would remain for the owners.
A more detailed calculation might also subtract intangible assets like goodwill. For example, if $200,000 of those total assets are intangible, tangible book value would be $2,000,000 - $200,000 - $500,000 = $1,300,000. Tangible book value is often considered a more conservative measure because intangible assets can be difficult to sell independently.
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 with a useful life of 10 years, which means the oven depreciates by $1,100 per year.
After 5 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 3, you'd add that to the original cost. The adjusted calculation becomes ($11,000 + $2,000) - $5,500 = $7,500. Improvements extend or enhance an asset's value, so they're added to the cost basis before depreciation is subtracted.
Book value vs. 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 is based on your accounting records: it reflects historical costs minus depreciation and liabilities. Market value is what buyers are actually willing to pay for your business or assets right now. External factors like supply and demand, industry trends, and economic conditions all influence market value.
For small businesses, market value often considers factors that don't appear on the balance sheet. A loyal customer base, a strong reputation in your community, and recurring revenue streams 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 than book value, it typically signals that investors see growth potential, strong management, or valuable intangibles that aren't captured in the accounting records.
When market value falls below book value, it could mean the business is undervalued or that the market expects future challenges. For a small business owner 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 down a company's book value on a per-share basis, making it easier to compare companies 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 evaluating whether a stock is trading 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 per share.
If the current share price is $45, the stock trades above book value, suggesting investors value the company's future earnings potential beyond its net assets. If the share price is $20, it trades below book value, which could indicate 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, giving you a quick way to assess 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 previous example where BVPS is $30 and the share price is $45, the P/B ratio is $45 / $30 = 1.5. This means investors are paying $1.50 for every $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. However, it could also signal that the market expects declining performance.
A P/B ratio above 1.0 indicates the market values the company above its accounting worth. This is common for businesses with strong growth prospects, valuable intellectual property, or other intangible advantages. P/B ratios vary significantly by industry, so compare within your sector rather than across all industries.
Why book value matters for your small business
Book value isn't just an abstract accounting concept. It plays a practical role in several key decisions you'll face as a business owner.
Here's how book value 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, as lenders often review book value when evaluating creditworthiness
Keeping your balance sheet accurate and up to date makes these calculations reliable. Cloud accounting software can help by automatically tracking asset values, recording depreciation, and generating balance sheet reports whenever you need them.
Limitations of book value
While book value is a helpful metric, it has some important drawbacks to keep in mind.
Book value has the following key limitations:
- It relies on historical costs, which may not reflect what assets are actually worth today
- It doesn't capture intangible assets like brand reputation, customer loyalty, or proprietary processes
- Depreciation methods vary, so 2 companies with identical assets could report different book values depending on their accounting approach
- It provides a static snapshot rather than a forward-looking view of your business's earning potential
- It can understate the value of businesses in knowledge-based or service industries where physical assets are minimal
Because of these limitations, it's best to use book value alongside other financial metrics like cash flow, revenue growth, and profitability. Together, they give you a more complete 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 customizable balance sheet reports, 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. 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?
You should review book value at least quarterly when you prepare financial statements. Calculating it more frequently, such as monthly, gives you a timelier view of your financial position.
Is a higher book value always better?
Not necessarily. A high book value could mean the company holds many assets, but those assets might be outdated or difficult to liquidate. Context matters more than the number alone.
How does goodwill affect book value?
Goodwill is an intangible asset that arises when a company acquires another business for more than its net asset value. It increases total assets on the balance sheet, which raises book value, but it doesn't represent a sellable physical asset.
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 as recorded on the balance sheet after accounting for depreciation or amortization.
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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.