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Book Value - How It Works and How Investors Can Use It

Stock Market Guides is not a financial advisor. Our content is strictly educational and should not be considered financial advice.

When it comes to the stock market, sometimes you might hear the term "book value" mentioned. It refers to a fundamental analysis metric that is popular among active stock traders.

This article will explain what book value is and how investors might be able to benefit from using it.

 

What Exactly Is Book Value?

Book value in the stock market refers to a specific measure of a company's worth.

A company's book value can be found on its balance sheet by subtracting the company's Total Assets from its Total Liabilities. That simple formula gives the book value of a company, which is also referred to as shareholder equity.

It can be helpful for stock market investors to look at a company's book value per share, which simply takes the company's book value and divides it by the company's total outstanding shares. The company's outstanding shares can also be found on its balance sheet.

 

Why Does Book Value Matter in the Stock Market?

In terms of the stock market, an investor can look at the book value of a company and compare it to the market capitalization of the company, and use that as a basis for deciding how to manage an investment.

If a company's stock price is lower than its book value per share, that could be a sign that the stock is undervalued and worthy of investment consideration. There is a metric called the Price-to-Book ratio that measures that ratio. An investor could buy the stock with anticipation that the stock price will eventually increase to match the company's book value per share.

An investor can also look at how a company's book value changes over time. For example, if a company's book value is regularly increasing, that might be considered a positive trait from an investor's point of view.

 

How Do You Find Stocks With Increasing Book Values?

You can find them by using our Increasing Book Value scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find stocks that have increasing book values.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock profiles manually to find stocks with increasing book values.

 

Limitations of Using Book Values

As is often the case, making an investing decision based on a single metric without any context may not be effective. As helpful as the book value metric might be, it has some limitations to consider.

 

Intangible assets are not accounted for.

Book Value does not account for intangible assets since they don't get assigned a value on the company's balance sheet. Some companies, such as software companies with a lot of customer contracts, have intangible assets that are worth quite a bit, yet they're unaccounted for in the book value calculation. Therefore, a company's book value might not always adequately determine the valuation of a company.

 

Example of a Book Value Investing Strategy

For this example of a Book Value investing strategy, we're going to look for stocks with increasing book values and plan to hold them for up to a year.

 

 

Our research suggests this simple strategy might have a track record of success.

 

Entry for the Book Value Investing Strategy

The entry for this Book Value strategy will be as follows:

The entry criterion for our Book Value investing strategy is very simple.

Exit for the Book Value Investing Strategy

There are a lot of possibilities here for the exit.

For any given investing strategy, it can be helpful to define two different criteria for the exit: a profit target and a time limit.

Not everyone sets exit criteria for a long-term investment, and that's totally fine. Ultimately, you are in charge of your investments, and you can manage them any way you want. But for the purposes of this investing strategy example, we will define them:

 

1. Profit Target

We will set a profit target that would reflect a 20% gain if the position were to be sold at that price.

In other words, we will take the price we paid for the stock at entry, multiply it by 1.2 (which effectively adds 20%), and use that to set up a sell limit order as a profit target.

If the sell limit order gets filled before the time limit is reached, then our investment is complete, and we will have realized a 20% return on investment.

2. Time Limit

We will set the time limit as one year. If the stock has not hit the profit target within one year of the date of stock purchase, then we can close the trade manually at the stock's prevailing price.

 

How Well Do Book Value Investments Actually Work?

The idea of a book value investing strategy sounds nice to many people because it offers a clear, easy-to-understand way to find an investment idea.

But does it actually work? Can traders indeed generate profits from buying stocks with increasing book values or low Price-to-Book ratios?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that investments based on increasing book values are not always profitable, but for certain stocks they might indeed have a track record of success according to our backtest research.

Here is some data that shows how a proprietary book value investment strategy we created has performed historically according to backtests:

 

 

Anyone who signs up for our stock scanner service will be able to see stocks that qualify for that trading strategy in real time.

 

Learning More About Book Value

You can contact us any time if you would like to ask any questions about book value or anything else related to the stock market.