Book value: Key figure for the valuation of shares

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The book value plays a role in both share valuation and company valuation in accounting for balance sheets. That is why it is also referred to as the balance sheet value. The book value provides both shareholders and companies with important information about the value of a company.

Legal basis

The book value is an important benchmark in commercial law for the valuation of companies in the balance sheet. However, there is no legal definition of book value. Rather, it is recognised as a known quantity in various paragraphs of the Commercial Code.

The book value is not used in tax law. Here, the current market value or the partial value as well as the fair market value of an item play a role for taxation.

So-called "book value clauses" often play a role in company acquisitions or the payment of partners. According to this, the book value of a company determines the amount of a partner's compensation.

In practice, such a clause tends to be disadvantageous for exiting shareholders, as the book value often differs from the actual market or current value of the company. Moreover, it says nothing about the actual substance of the company and is only one criterion among many.

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Relevance to share trading

Shareholders often look at the so-called price-to-book ratio (P/B ratio). It is determined on the basis of the following formula.

KBV = price of a share / book value of a share

In this case, the book value of a company in relation to the securities issued plays a role. However, the price-to-book ratio is not always a reliable measure.

This is because the book value of a company does not always have to correspond to the actual value. For example, the book value of a public company may be high at first glance.

However, the actual value of the company may have fallen due to a deteriorated reputation. The P/B ratio becomes even less reliable if the share price in metatrader is higher than expected.

Book value of a share

The book value of a share is expressed by the price-to-book ratio.

Shares below book value: Shares below book value are securities whose P/B ratio is very low. The company thus has a higher book value in relation to the share price. In other words, the shares are cheap and do not equal the book value. In this case, the KBV is below the value of 1. Then the substance of the company is higher than the price investors pay for it on the stock exchange. For shareholders, these shares are usually considered a buy signal.
Shares above book value: If the shares are above the book value of the company, the price is higher than the equity.

In practice, investors should not rely solely on the price-to-book ratio for shares. It is true that the shares of a company can be sold below book value. However, this is far from exhausting all the criteria for valuation. For example, it is possible that not all assets were listed in the company's balance sheet. It is also conceivable that not all liabilities have been taken into account. Thus, a low P/B ratio may reflect the actual decreased value of the company. For investors, such a security is then useless.