Book value per share

What it means

Book value per share is a company's balance sheet equity divided by the number of shares. It expresses what one share would be worth according to the books, meaning how much equity falls to it if the assets were sold at book values and all liabilities paid off.

Comparing it with the market price gives the price-to-book ratio. If the market price is higher, the market values the company above its book value, for example because of its brand, customers, know-how or expected growth, which are absent from the balance sheet or only partly reflected.

Book value differs from the nominal value of a share stated in the articles, which represents a share of registered capital. Nominal value changes only when registered capital changes, while book value moves with every profit, loss, dividend payment or change in reserves.

How it works in practice

For investors, book value per share is one of the indicators that complement the price-to-earnings ratio and market capitalisation. It carries more weight for banks, insurers and holding companies, where the balance sheet reflects asset values well.

In unlisted companies, book value is sometimes used as a simple starting point for transfers of shares between shareholders. It is usually not enough for a business valuation, however, because it ignores future profitability and hidden value in assets.

Paying dividends reduces equity and therefore book value per share, while retained profit increases it. Tracking book value over time thus shows whether the company is creating value for shareholders or eroding it through losses.

What to watch out for

Book value is based on historical costs and accounting rules, so it can significantly understate or overstate the real value of assets. Property bought many years ago may appear at a fraction of its market value, while obsolete inventory may be overstated.

The calculation should use shares outstanding and, where there are different share classes, take their different rights into account. Preference shares with priority claims on dividends or liquidation proceeds can distort the result if treated the same as ordinary shares.