Book Value | Investing Glossary

What it is

Book value — also called net asset value (NAV) or shareholders' equity — is the residual value left for shareholders after a company pays off all its liabilities. It's what the accountants say the business is worth on the balance sheet, as opposed to what the market says it's worth (market cap).

The gap between the two is one of the most interesting questions in equity analysis.

How to calculate it

**Book Value = Total Assets − Total Liabilities**

On a per-share basis: Book Value Per Share = Book Value ÷ Shares Outstanding

The comparison to share price gives the Price-to-Book ratio (P/B) — a stock at £5 with book value per share of £2 has a P/B of 2.5x.

What's included (and what isn't)

This is where book value gets complicated. The balance sheet includes:

Assets:

Cash and short-term investments (liquid, reliable)
Trade receivables (money owed by customers — some may not be collected)
Inventory (valued at cost or market, whichever is lower)
Property, plant, and equipment (at historical cost minus accumulated depreciation)
Goodwill and intangible assets (from acquisitions — potentially unreliable)

What's missing:

Internally generated brand value (Diageo's brand is worth billions; it's on no balance sheet)
Human capital (the value of teams, institutional knowledge)
Customer relationships not acquired through M&A
The competitive moat itself

This systematic exclusion of intangible value is why the majority of modern companies trade at significant premiums to book value, and why P/B has become a less reliable standalone metric outside certain sectors.

When book value matters most

Investment trusts and funds: NAV is the primary valuation metric. An investment trust trading at a 10% discount to NAV means you're buying £1 of assets for 90p — potentially attractive, if the discount is likely to narrow.

Banks: Regulatory capital requirements mean book value is central to banking valuation. Return on equity (ROE = profits ÷ book value) is the primary profit measure, and P/B relative to sustainable ROE determines whether a bank is cheap or expensive.

Property companies (REITs): Net asset value is the benchmark, though in the UK the preferred measure is EPRA NTA (Net Tangible Assets) which adjusts for property revaluations.

Distressed companies: When a business is loss-making and the question is whether it has enough assets to survive, book value gives a floor valuation — albeit one that may be optimistic if assets are illiquid or overvalued.

The goodwill problem

Goodwill is the premium a company pays over book value when making an acquisition. It represents intangibles like brand, customer relationships, and synergies. After years of acquisitions, large conglomerates can have goodwill representing 40–60% of their total assets.

Goodwill is only written down when there is evidence of impairment — when the acquisition is performing below expectations. Management is typically reluctant to impair goodwill until absolutely necessary, which means balance sheets can carry significantly overstated goodwill for years before the write-down eventually comes.

Price/Tangible Book strips out goodwill and other intangibles, giving a more conservative view of the genuine physical and financial assets backing the shares. For asset-heavy businesses, this is often a more reliable floor value.

**UK context:** Since the accounting treatment of goodwill changed in the early 2000s (from amortisation to impairment testing), UK balance sheets have accumulated large goodwill balances from serial acquisitions. Check the goodwill balance relative to total equity — if it's above 50%, the stated book value is significantly influenced by acquisition accounting rather than underlying asset value.

Not financial advice. Book value analysis is most meaningful in combination with earnings quality and sector context.