What is Book Value Per Share? How to Use It for Stock Valuation
Book value per share is the amount each share would be worth if the company sold all its assets, paid off all its debts, and distributed the remaining money to shareholders. It is an accounting measure of what the company is worth on paper, based on its balance sheet.
Imagine you own a shop. You have furniture worth Rs.5 lakh, stock worth Rs.3 lakh, and Rs.2 lakh cash in the bank. But you also owe Rs.4 lakh to a supplier. Your book value is Rs.6 lakh (10 lakh in assets minus 4 lakh in liabilities). If you had 1,000 ownership certificates for the shop, each certificate's book value would be Rs.600. That is exactly what book value per share tells you for a listed company.
How is book value per share calculated?
Book Value Per Share = (Total Assets - Total Liabilities) / Total Outstanding Shares
Take SBI as an example. If SBI has total assets of Rs.60 lakh crore, total liabilities of Rs.56 lakh crore, and about 890 crore outstanding shares:
Net Assets = Rs.60 lakh crore - Rs.56 lakh crore = Rs.4 lakh crore
Book Value Per Share = Rs.4 lakh crore / 890 crore = approximately Rs.449 per share
If SBI's market price is Rs.800 per share, it means investors are paying almost 1.8 times the book value. This ratio is called the Price to Book or PB ratio.
What is the Price to Book (PB) ratio?
PB Ratio = Market Price Per Share / Book Value Per Share
| PB Ratio | What It Suggests |
|---|---|
| Below 1 | Stock is trading below its accounting value. Could signal undervaluation or problems |
| 1 to 2 | Trading near book value. Common for banking and financial stocks |
| Above 3 | Market values the business far above its tangible assets. Common for tech and FMCG |
PB ratio is most useful for asset-heavy industries like banking, real estate, and infrastructure where book value closely represents the company's actual worth. For technology companies like TCS or Infosys, where value comes from intellectual capital and people, book value is less meaningful.
What are the limitations of book value?
Book value is based on historical cost of assets, not their current market value. A piece of land bought in 1990 for Rs.10 lakh might be worth Rs.10 crore today, but the balance sheet still shows it at Rs.10 lakh. This makes book value an incomplete picture for companies holding significant real estate or old assets.
Book value also does not capture brand value, customer relationships, or intellectual property. These intangible assets are often the most valuable part of modern businesses but do not appear on the balance sheet. You can check book value and PB ratio for any stock at stockk.trade/products/equity.
Investments in securities market are subject to market risks. This article is for educational purposes only.
Frequently Asked Questions
A stock is trading below its book value. Is it automatically a good buy?
Not necessarily. A PB ratio below 1 can mean the market sees problems that the balance sheet has not yet reflected, such as potential write-downs, declining asset quality, or poor future earnings. Many PSU stocks and some banking stocks trade below book value for extended periods because investors expect further losses or slow growth. Always investigate why a stock is cheap before buying.
How often does book value change?
Book value changes every quarter when the company publishes updated financial statements. Profits increase book value because they add to reserves. Losses decrease it. Dividend payments and share buybacks also reduce book value. Large one-time asset write-downs can cause a sudden drop in book value even without operational losses.
Which sectors are best compared using PB ratio?
Banking and financial services are the most common sectors where analysts use PB ratio as a primary valuation tool. This is because bank assets and liabilities are largely financial instruments whose book values are closer to market values. For insurance companies, NBFCs, and real estate firms, PB ratio is also a relevant metric.
Is book value useful for evaluating IT companies?
Less so. IT companies like TCS and Infosys have most of their value in human capital, client relationships, and brand reputation, none of which appear on the balance sheet. These companies typically trade at very high PB ratios, not because they are overvalued, but because book value understates their true worth. For IT companies, PE ratio and earnings growth are more useful metrics.
What is the difference between book value and net worth?
In most contexts, they mean the same thing. Both refer to total assets minus total liabilities. Some analysts use net worth to include only equity capital and reserves, excluding preference share capital. For practical purposes when evaluating stocks, you can treat book value and net worth as equivalent measures.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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