Glossary
Book Value
A company's net worth as recorded in its books
Book value is a company's assets minus its liabilities as recorded in the accounts. It approximates what would theoretically be left for shareholders if the company sold everything and repaid all its debts today.
Comparing it with the share price gives the price-to-book ratio, calculated by dividing the share price by book value per share. A ratio of 1 means the market values the company at exactly its recorded net assets, and below 1 means it trades for less than the accounts say it is worth.
Does a low price-to-book always mean cheap? No. If the market believes those assets would not fetch their recorded value, or that they are not generating profit, the ratio stays low indefinitely. A stock that looks cheap for years on end is known as a value trap.
Book value also fits some industries poorly. For manufacturers and banks, heavy in plant and buildings, it tracks real value fairly well. For a software company, the real assets are technology, people, and brand, almost none of which appear on the balance sheet, so a very high price-to-book is normal there. Book value is most useful as a yardstick in asset-heavy industries.