Book value
Learn what book value means, how to calculate it for a business or asset, and how it compares to market value.
Published Wednesday 5 August 2026
Table of contents
Key takeaways
- Book value is the net worth of a business or asset, calculated as total assets minus total liabilities, and represents shareholders' equity on the balance sheet.
- Comparing book value to market value reveals whether a company or share may be undervalued or overvalued by investors.
- Book value per share (BVPS) and the price-to-book (P/B) ratio help you evaluate a company's financial position relative to its share price.
- Book value relies on historical cost and misses intangible assets like brand reputation, which can understate the true worth of knowledge-based businesses.
What is book value?
Book value is the net worth of a business or asset as recorded in the accounting books. It represents what would remain for shareholders if a company sold all its assets and paid off all its liabilities.
Book value of a business
For a company, book value equals shareholders' equity, also known as net asset value. This figure appears on the balance sheet and shows the residual interest owners have in the business after all debts are settled. If you're planning to sell your business, book value provides a starting point for negotiations, though buyers often consider other factors like future earnings potential.
Book value of an asset
For an individual asset, book value is the original purchase cost minus accumulated depreciation or amortisation. This reflects the portion of the asset's value that has been used up over time. For example, a delivery vehicle loses book value each year as depreciation is recorded, even if it still runs well.
Book value formula
There are two core formulas for calculating book value, depending on whether you're measuring a whole business or a single asset.
Company book value formula
To find a company's book value, subtract total liabilities from total assets.
Book value = total assets − total liabilities
Total liabilities include all debts and obligations, from bank loans to accounts payable. The result shows the net amount belonging to shareholders.
Asset book value formula
To find an individual asset's book value, subtract accumulated depreciation from the original cost.
Book value of asset = original cost − accumulated depreciation
This formula applies to tangible assets like equipment, vehicles and buildings that lose value over their useful life.
How to calculate book value of a company
Calculating a company's book value requires figures from your balance sheet. Here's a worked example using a plumbing business.
The business has total assets of R2,000,000 and total liabilities of R500,000.
Book value = R2,000,000 − R500,000 = R1,500,000
This means the business has a book value of R1,500,000, representing the shareholders' stake in the company.
Some investors prefer tangible book value, which excludes intangible assets like patents or trademarks. If the plumbing business has R200,000 in intangible assets, the tangible book value would be:
Tangible book value = R1,500,000 − R200,000 = R1,300,000
How to calculate book value of an asset
Asset book value tracks how much value remains after depreciation. Here's an example using a bakery oven.
A bakery buys an oven for R11,000. Using straight-line depreciation over 10 years, the annual depreciation expense is R1,100.
After five years, the accumulated depreciation totals R5,500. The book value at this point is:
Book value = R11,000 − R5,500 = R5,500
If the bakery adds an improvement costing R2,000 in year three (such as a new heating element), the adjusted calculation becomes:
Book value = (R11,000 + R2,000) − R5,500 = R7,500
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 assess whether a business is fairly priced.
What's the difference?
Book value is based on historical accounting records. Market value reflects what investors are willing to pay right now, influenced by future earnings expectations, brand strength and industry trends. A profitable company with strong growth prospects often trades well above its book value.
When they diverge
Market value can exceed book value when investors expect future profits to outpace the recorded asset base. This is common in technology or service businesses with valuable intellectual property. Conversely, market value may fall below book value during economic downturns or when a company faces financial difficulties, signalling potential undervaluation or deeper problems.
Book value per share
Book value per share (BVPS) divides a company's book value across its outstanding shares. This metric helps investors compare the accounting value to the current share price.
BVPS formula
The formula for book value per share is:
BVPS = (total assets − total liabilities) / total outstanding shares
This gives you the book value attributable to each share.
BVPS example
A company has R5,000,000 in assets, R2,000,000 in liabilities and 100,000 shares outstanding.
BVPS = (R5,000,000 − R2,000,000) / 100,000 = R30 per share
If the share price is R45, the shares trade above book value, suggesting investors expect future growth. If the share price is R20, the shares trade below book value, which could indicate undervaluation or concerns about the company's prospects.
Price-to-book (P/B) ratio
The price-to-book ratio compares a company's market price to its book value. Investors use this metric to gauge whether shares are trading at a premium or discount to their accounting value.
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 with a BVPS of R30 and a share price of R45:
P/B ratio = R45 / R30 = 1.5
This means investors pay R1.50 for every R1 of book value.
How to interpret the P/B ratio
A P/B ratio below 1.0 suggests the share trades below its accounting value, which may indicate undervaluation or underlying problems. A ratio above 1.0 means investors pay more than book value, often because they expect strong future performance.
P/B ratios vary significantly by sector. Banks and insurers often have lower ratios (around 0.8–1.5) because their assets are already marked close to market value. Technology and software firms frequently trade at ratios above 5.0, reflecting the value of intellectual property and growth potential. Manufacturing and industrial companies typically sit in the mid-range (around 1.5–3.0). Always compare P/B ratios within your sector rather than across industries.
What changes book value over time
Book value isn't static. Several factors cause it to rise or fall from one reporting period to the next.
- Retained earnings and profits increase book value as net income adds to shareholders' equity
- Net losses reduce book value by decreasing retained earnings
- Asset write-downs and depreciation reduce book value as asset values decline
- Dividends paid to shareholders reduce book value by distributing retained earnings
- Share buybacks reduce book value by returning capital to shareholders
- Issuing new shares raises total equity and increases book value
Why book value matters for your small business
For small business owners, book value offers a clear snapshot of your company's financial position. Here are five reasons to track it.
- Assess your financial health by comparing what you own to what you owe
- Set a starting point for sale negotiations or investor discussions
- Track asset depreciation to plan for equipment replacement
- Understand your debt position relative to your equity
- Support loan applications with documented evidence of your net worth
Using cloud accounting software makes it easier to pull accurate asset and liability figures whenever you need them.
Limitations of book value
While book value is useful, it has several limitations you should keep in mind.
- It relies on historical cost, which may not reflect current market conditions
- It misses intangible assets like brand reputation, customer loyalty and proprietary knowledge
- Depreciation methods vary between companies, making comparisons less reliable
- It provides a static snapshot that can quickly become outdated
- It tends to understate the value of knowledge-based and service businesses
Simplify your financial reporting with Xero
Tracking book value requires accurate, up-to-date financial records. Xero brings your assets, liabilities and equity into one place, giving you a clear view of your business's net worth. With automated bank feeds and real-time reporting, you can monitor changes to book value without manual data entry. Ready to take control of your finances? Start today and get one month free.
FAQs on book value
Here are answers to common questions about book value and how it applies to your business.
Why is it called book value?
The term comes from a company's accounting books or ledgers, where assets and liabilities have historically been recorded. Book value refers to the value as documented in these records rather than the price someone might pay on the open market.
Can book value be negative?
Yes, book value can be negative when total liabilities exceed total assets. This often signals financial distress, though some high-growth companies carry negative book value while remaining viable through strong cash flows or investor funding.
How often should you calculate book value?
Most businesses calculate book value at least quarterly when preparing financial statements. Monthly tracking gives you a more current picture, especially if you're managing significant assets or planning a major financial decision.
Is a higher book value always better?
Not necessarily. A high book value may indicate strong asset backing, but it could also mean capital is tied up in assets that generate low returns. Context matters: compare book value growth against profitability and industry benchmarks.
How does goodwill affect book value?
Goodwill is an intangible asset recorded when a company acquires another business for more than the fair value of its net assets. It increases total assets and therefore book value, but it's excluded from tangible book value calculations.
What's the difference between book value and carrying value?
The terms are often used interchangeably. Both refer to an asset's value as recorded on the balance sheet after accounting for depreciation, amortisation or impairment. Some accountants reserve "carrying value" for individual assets and "book value" for company-wide calculations.
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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.