What is Book Value?

Book value is an asset's original cost, less any accumulated depreciation and impairment charges that have been subsequently incurred. The concept is commonly applied to an evaluation of an entire business. For example, it is the stated amount of all equity listed on a company’s balance sheet, and is supposed to be indicative of the value of the business. Value investors use this information to decide whether the shares issued by a business are overvalued or undervalued by comparing the book value per share to the market price per share.

If all assets were to be liquidated at their book values and used to pay off the stated amount of liabilities on an entity’s balance sheet, this would be the residual amount of cash remaining.

Reasons Why Book Value and Market Value Differ

The book value of a company may vary substantially from its market value, which is usually higher. A third party could pay substantially more than book value for a business, because it could obtain many additional benefits than just those stated on the balance sheet. For example:

The value of a company's brand names
The value of a company's intellectual property
The value of a company's intangible assets
The value of a company's early positioning in a valuable market
The value of a company's distribution network

In some cases a company may sell for less than its book value. This can happen when assets are overstated on the balance sheet, or when there is a "fire sale" situation in which there are few buyers making competing offers for the business.