---
title: "What is the Book Value of a Stock?"
description: "What is the book value of a stock? Why book value matters when investing in a company."
canonical_url: https://trendshare.org/how-to-invest/what-is-the-book-value-of-a-stock
markdown_url: https://trendshare.org/ai/what-is-the-book-value-of-a-stock.md
published: 2014-02-16
last_updated: 2018-01-29
content_license: https://trendshare.org/about/disclaimer
---
# What is the Book Value of a Stock?

Source: https://trendshare.org/how-to-invest/what-is-the-book-value-of-a-stock
Updated: 2018-01-29
You're interested in buying a stock. You've done your research and you
believe the company has a great product. It knows its customers. It has been
making a profit ([earning real money](https://trendshare.org/how-to-invest/earnings-matter-most)) and you
believe the stock is priced fairly.

How do you measure your risk?

## The Biggest Risk in Investing is Bankruptcy

The *worst* risk is that [the company may go bankrupt](https://www.investopedia.com/terms/b/bankruptcyrisk.asp) and have to sell off all of its assets to pay off its
creditors. If that's the case, what happens to you as a shareholder? Whatever's
left after those creditors take their cut is available to you. That might not
be much.

To minimize your risk of a bankruptcy scenario, you have to know what the
company is worth.

## What Happens in Bankruptcy?

What happens in a bankruptcy? Any company has assets (things of value) and
liabilities (debt owed). In a bankruptcy situation—going out of
business—a business will best to pay back those liabilities by selling
off its assets. Whatever money it can get from that goes to its creditors.

As you might expect, that scenario has a lot of wiggle room. A Canadian
Maple Syrup company facing total liquidation in bankruptcy might not be able to
sell off its inventory of maple syrup or glass bottles or a label-printing
factory at full cost (especially if there's no demand for syrup and that's why
the business is in trouble). Just like with other investments (and especially
with [penny stocks](https://trendshare.org/how-to-invest/how-do-you-make-money-with-penny-stocks)), you
can't tell what someone will pay for an asset until you find a buyer to sign
the check.

You can, however, get a pretty good idea.

## What is Book Value?

A business's *book value* is the amount of its assets minus its
liabilities. This is easy to calculate from a financial statement. You'll often
see it stated as *owner equity* or *shareholder equity*.

This figure can be a little vague—who knows how much your maple syrup
factory can sell for in a fire sale?—but it's a good estimate. If you
compare the book value to the market capitalization of the company, you've
measured investor sentiment toward the stock. If the book value is less than
the market value, investors may think the company has less tangible assets (a
strong brand, goodwill among customers, patents or trademarks or trade secrets)
that will influence how much money the company can make. If the book value is
greater than the market value, [the stock may be underpriced](https://trendshare.org/how-to-invest/what-is-value-investing); you may have found a value.

## Limits of Book Value

Of course, book value doesn't take into account [the value of future earnings of the company](https://trendshare.org/how-to-invest/what-is-present-value).
It's an estimate and a snapshot of current assets and liabilities. It
*can* help you decide how much risk you have of losing your investment
in bankruptcy (though it usually can't tell you how much risk there is of the
company going bankrupt, unless the book value is abysmally low).

A stock with a high book value compared to its market cap may have an asset
that the price of the stock doesn't yet reflect. For example, a national
retailer may own a lot of prime real estate in malls and shopping centers
across the country. If the value of that land has increased—even if the
shopping business stays flat—the book value may increase.

## Analyzing Companies with Financial Ratios

As usual, your best option is to compare the financial ratios and
measurements of companies in similar industries and investment sectors. It's
harder to manipulate this number than it is to [massage earning numbers with GAAP](https://www.gsb.stanford.edu/faculty-research/publications/pro-forma-earnings-whats-wrong-gaap), which means that the book value is often more
informative to value investors than the [P/E ratio](https://trendshare.org/how-to-invest/what-is-the-pe-ratio). Yet unlike present value calculations favored by value investors, it
only takes into account *reported* assets and liabilities.

Book value is a single data point which may help you identify good stocks
worth investing in. It's not the only number to track. It's not the most
important number to track, either—but when you see an outlier, that's a
sign you should look more closely at the company.