Book Value is a company's Total Assets minus Total Liabilities. It is equivalent to Total Equity or Shareholders' Equity. If the company was liquidated, the Book Value would be the money the shareholders will receive.
Increasing Book Value is a good thing. Decreasing Book Value is a bad thing. A good company has an increasing Book Value over time because it is paying down its debt and buying other great businesses. A bad company has a decreasing Book Value because it is acquiring more debt to keep its business afloat.
Comparing the company's Market Capitalization to its Book Value may indicate whether the stock is overpriced or undervalued. This comparison is the Price to Book (P/B) Ratio. Most companies have a ratio of greater than 1. However, a ratio of less than 1 could be a buying opportunity of a lifetime.
The Price to Book Value Ratio can be used to determine the True P/E Ratio of a company's stock portfolio. Just multiply the company's Price to Book Ratio by the P/E Ratio of each of the stocks it owns. This will tell you how much you are really paying for the company's stock portfolio. For example, if Berkshire Hathaway's Price to Book was 2, and Coke's P/E Ratio is 20. The True P/E of Coke would be, 2x20 = 40, for each Berkshire Hathaway share. A good opportunity to by Berkshire Hathaway shares is when the Price to Book Ratio is close to 1, or better, less than 1.
Equations
