Lesson 4 of 7 · All lessons in this module
- Intrinsic value, mispricing and the three model familiesVideo lesson
- Perceived value, investor and issuer actions, and value ranges
- Book value, market value, ROE and the cost of equityVideo lesson
- Book value of equity: what it measures and how it misleads
- Market capitalisation, price-to-book and enterprise value
- Absolute valuation: present value and asset-based models
- Relative valuation and reconciling several models
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 4 of 7 · 12 min
Book value of equity: what it measures and how it misleads
Book value of equity records net assets at accounting values, so analysts adjust it, especially by removing intangibles such as goodwill, and read it with care when it has been hit by write-downs or turned negative by payouts.
In short
- Book value of equity = book assets − book liabilities, or equivalently share capital + additional paid-in capital + retained earnings − treasury stock. It excludes minority (non-controlling) interest.
- Historical cost and depreciation distort comparisons: newer assets carry higher values than older ones.
- Internally generated intangibles are usually expensed, purchased ones are capitalised, and acquisitions add goodwill; so analysts typically exclude intangibles from book value.
- Book liabilities may understate contingent liabilities (product liability, environmental, legal).
- Book value is most useful for firms with large tangible assets and similar asset structures; it is weak for asset-light and early-stage firms.
- Negative book value can signal distress, but profitable firms can reach it by paying out more than they earn.
Unlock this lesson free for 7 days
Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.