Book value
Also written Net worth per share
A company's net worth — equity capital plus reserves — divided by its outstanding shares, the accounting value each share would theoretically get if the company wound up today.
In plain language
Book value asks a simple question: if the company sold every asset at the value shown in its books and paid off every liability, how much would be left for each share?
It is called "book" value because it comes straight from the accounts, not from the market. Assets are shown there at historical cost, less depreciation — which is not the same as what they could actually be sold for.
How it works
Book value per share = Net worth ÷ Number of outstanding shares
Net worth = Equity share capital + Reserves and surplus
The workbook is explicit about the limitation: "the realizable value of these assets may be different from book value and is never known with certainty." Book value is most trustworthy for a company that has built genuine reserves from years of real profitability, and least trustworthy where assets are old, specialised, or carried at cost far above what they could fetch in a sale.
A worked example
A company reports equity capital of Rs 10 lakh and reserves and surplus of Rs 50 lakh, with 6 lakh shares outstanding, currently trading at a market price of Rs 20.
Net worth = 10 lakh + 50 lakh = Rs 60 lakh
Book value per share = 60 lakh ÷ 6 lakh = Rs 10
Price to Book Value = 20 ÷ 10 = 2x
The stock trades at twice its book value. Whether that is expensive depends entirely on what those underlying assets are actually worth and what return the company earns on them — book value on its own does not answer that.
Why NISM asks about it
Chapter 3.1.13 (Price-to-Book Value Ratio) introduces the computation with this exact worked example, and Chapter 10.8.1 revisits it as a relative-valuation multiple. Expect a question that hands you a balance sheet extract and share count and asks for book value per share, or the Price/Book value ratio built from it.
Common exam traps
- Book value is historical cost less depreciation, not market or liquidation value. A P/BV ratio below 1 is not automatically a bargain — the workbook's own caution is that it may instead reflect assets that genuinely need to be written down.
- Do not confuse book value with adjusted book value, which restates both sides of the balance sheet to fair value and brings in off-balance-sheet items — a different, stricter measure used mainly for NBFCs.
Check yourself
1.For which type of company is the Price-to-Book Value ratio most useful?
- a)A services company with very few assets
- b)Banking and financial institutions, whose balance sheets carry monetary assets mostly valued at ongoing market prices
- c)A company with very high and stable earnings
- d)A company with no reserves
Show the answer
Answer: (b) Banking and financial institutions, whose balance sheets carry monetary assets mostly valued at ongoing market prices
It is a good measure to value stocks of companies, such as in the banking and financial institutions. This is because their balance sheets carry liabilities and monetary assets on the asset side, which are mostly valued at the ongoing market prices. In other companies the asset side carries depreciable tangible assets, and to be amortised intangible assets.
And option A is expressly excluded: however, for sectors such as the services, where assets are limited, this valuation method may not be relevant.
P/BV's general limitation: an important limitation of this number is that most assets on the books of the company are shown at their historical cost less depreciation and not their realizable/liquidation value. A bank's assets are largely loans and securities carried near market value, so the limitation bites much less.
Its other main use: P/BV is a useful measure to value stocks where the earnings are negative and the more widely used PE ratio is not applicable.
And in a company with sustained profits: in a company which has been building reserves from sustained profitability, the book value is an important indicator of value.
Compare P/S, which serves a similar rescue function: this ratio is especially useful for companies in industries that are temporarily going through a phase of negative profits (i.e., losses). In such cases earnings based multiple would be meaningless.
2.On a standalone basis, if market capitalisation is ₹10 lakh, total debt ₹3 lakh and cash ₹4 lakh, the Enterprise Value is:
- a)₹17 lakh
- b)₹13 lakh
- c)₹9 lakh
- d)₹6 lakh
Show the answer
Answer: (c) ₹9 lakh
EV = [Market Value of common equity of the Parent + Market Value of preferred capital of the Parent + Market Value of Debt of the Parent] − (cash, cash equivalents and non-operating/non-strategic financial investments of the parent only).
10 + 3 − 4 = ₹9 lakh.
Option A adds the cash instead of subtracting it, which is the trap.
Why cash is deducted: a business is funded by various sources of capital, however EV focusses only on the capital that is gainfully employed in the business. Cash sitting idle is not employed in the business — an acquirer effectively recovers it on day one.
On the equity input: it is the market value of common equity, not the book value. In the workbook's worked example the balance sheet shows common equity ₹12.5 crore, but the calculation uses market capitalisation = 340 × 10,00,000 = ₹34 crores instead.
And for unlisted components: since it is difficult to obtain fair market value for unlisted securities and bank debt, analyst may use the balance sheet values as a proxy if the fair market value is not available.
The consolidated version additionally includes the value of non-controlling interest and the subsidiary's preferred capital and debt, less the subsidiary's cash and non-operating investments.
3.A company has a price-to-earnings ratio of 10 and a price-to-book-value ratio of 5. Its book value per share is ₹15 and 10,000 shares are outstanding. What is its return on equity?
- a)25%
- b)75%
- c)50%
- d)20%
Show the answer
Answer: (c) 50%
Set the ratios against each other and price cancels out.
ROE = Earnings ÷ Book value = (Price ÷ Book value) ÷ (Price ÷ Earnings) = P/BV ÷ P/E
= 5 ÷ 10 = 0.5 = 50%
You can verify it the long way. Book value per share ₹15 and P/BV of 5 give a price of ₹75. A P/E of 10 gives EPS = 75 ÷ 10 = ₹7.50. ROE = 7.50 ÷ 15 = 50%.
Notice that the share count of 10,000 is irrelevant — every quantity here is per share, so the number of shares cancels. It is in the question purely to invite unnecessary work, and it is a common feature of NISM numericals: check which given figures the formula actually needs before you start multiplying.
20% is the answer from inverting the ratio (10 ÷ 5 = 2, misread), and 25% and 75% come from combining the numbers arbitrarily.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Adjusted book valueFair value of a company's assets minus the fair value of its liabilities, factoring in off-balance-sheet items — used to value non-banking financial companies (NBFCs).
- Intrinsic valueWhat an asset is actually worth — the present value of the cash it will generate over its remaining life, as against whatever price the market is quoting today.
- Price to Book ValueShare price divided by book value per share — how many times the accounting net worth of a company the market is willing to pay.
- Return on EquityProfit after tax as a percentage of shareholders' net worth — what the company earned on the money its owners have left in it.
- Other Comprehensive IncomeGains and losses that Ind AS requires or permits to bypass the profit and loss account — they change shareholders' equity and never touch earnings per share.
- Stock splitA corporate action that cuts the face value of a share in a defined ratio and multiplies the number of shares to match — more shares, a lower price, and not one rupee of new value.
- Differential Voting RightsEquity shares that carry less than one vote each, letting a company raise capital without diluting control — and letting an investor who does not want the vote buy the same economics at a discount.
- Cost based valuationValuing an asset by what it would cost to build it from scratch today, rather than by its cash flows or the price of comparable assets — mainly used by strategic, not financial, investors.
- Off-balance sheet itemAn asset, liability or exposure that does not appear on a company's balance sheet, such as certain leases, contingent liabilities or derivative contracts disclosed only in the notes.
- ReservePart of a company's equity set aside from profit for a general or specific future use, such as a general reserve or a capital reserve — distinct from a provision, which is a liability.
- Replacement valueThe cost of setting up an identical company from scratch today, with the same assets and infrastructure — one of several benchmarks for what an existing business is worth.
- GoodwillThe amount an acquirer pays over and above the fair value of the net assets it takes over, shown as an intangible asset and tested periodically for impairment.
- Non-controlling (minority) interestThe share of a subsidiary's equity and profits belonging to shareholders other than the parent — a line that appears only in consolidated financial statements.
- Book Value approachThe first of the three asset-based valuation methods: value the company at the historical carrying cost of its assets and liabilities, giving a book value per share treated as the floor price.