What is book value — and when does it matter?
Book value is the accounting value of a company — what it would be worth if you sold everything it owns and paid off everything it owes.
How book value is calculated
Book Value = Total Assets minus Total Liabilities. Divide by the number of shares to get Book Value Per Share.
Suppose a company owns a factory worth ₹500 crore, inventory worth ₹100 crore, and cash of ₹50 crore. It owes bank loans of ₹200 crore and supplier payments of ₹50 crore.
Book value = (500 + 100 + 50) − (200 + 50) = ₹400 crore. With 10 crore shares, book value per share = ₹40.
Price to Book ratio (P/B)
P/B ratio compares the market price to book value: Current Price ÷ Book Value Per Share.
If it trades at ₹80 and book value is ₹40 — P/B is 2. The market believes the company can generate returns above and beyond its asset value. If it trades at ₹20 — P/B is 0.5. Either the market is being overly pessimistic, or those assets are not as valuable as the balance sheet suggests.
When P/B matters most — and when it does not
P/B is most useful for banks and financial companies (their assets are mostly financial, so book value is meaningful), asset-heavy industries like steel and cement, and distressed companies where you want to know the liquidation floor.
P/B is less useful for software and IT companies (their most valuable assets — talent, code, brand — do not appear on the balance sheet), consumer brands like Titan (the brand is worth far more than the balance sheet shows), and any company where future earnings drive the value.
The limitation of book value
Balance sheets use historical cost — assets are recorded at what was paid for them, not what they are worth today.
A factory built in 1990 for ₹50 crore may be worth ₹500 crore today — or ₹0 if the technology is obsolete. The balance sheet shows neither. Book value is a starting point, not a conclusion.
See it in practice
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