I just reviewed a concept that many novice investors overlook, and honestly, it deserves more attention: book value per share. It’s not the same as the face value (which we looked at earlier), so it’s important to be clear on this if you want to operate with sound judgment in the stock market.

Basically, when we talk about what book value per share is, we’re referring to a company’s equity divided among each share. That is, shareholders’ equity plus reserves, divided by the number of shares. The main difference with the face value is that the face value is fixed from issuance, while the book value changes over time depending on how the company performs.

In the world of value investing, it’s also called book value, and it’s the foundation of that entire strategy. The idea is simple: look for companies where the market price is well below what they’re truly worth according to their balance sheets. If you find that, you’re theoretically buying cheap, expecting the market to eventually correct.

Now, there’s a very useful tool that comes from this: the P/B ratio (Price/Book Value). It’s calculated by dividing the market price by the book value per share. If the result is greater than 1, the stock is expensive relative to its books. If it’s less than 1, it’s cheap. For example, if a company has a book value of 26 euros per share but trades at 84 euros, the P/B would be 3.23, indicating overvaluation. Conversely, if another company has a book value of 31 euros and trades at 27, the P/B of 0.87 suggests undervaluation.

To calculate a company’s book value per share, the formula is straightforward: take the assets, subtract the liabilities, and divide by the number of shares outstanding. Book value per share = (Assets – Liabilities) / number of shares. Imagine a company with 3.2 billion in assets, 620 million in liabilities, and 12 million shares. The calculation would be (3,200 – 620) / 12 = 215 euros per share.

What’s interesting is that this works well for certain sectors, especially in companies with a lot of tangible assets. But here’s the important critique: book value ignores intangible assets. A software company might have low development costs but huge revenues, and that’s not reflected on the books. That’s why tech companies always tend to have higher P/B ratios than others.

It also tends to be quite inaccurate for small caps. These small companies are often newly created, so their book value can be far from their actual market price. Plus, investors often buy them based on future promises, not what they already own.

Another problem: creative accounting. Accountants can legally manipulate numbers, overvalue assets, and undervalue liabilities. That can lead you to totally wrong conclusions.

The case of Bankia is the perfect example of why you shouldn’t trust this blindly. It went public in 2011 with a 60% discount to its book value, seeming like a bargain. But it ended up being a disaster, absorbed by Caixabank in 2021. That shows that a low P/B ratio doesn’t guarantee anything if the company is fundamentally rotten.

So, in summary: book value per share is useful as part of fundamental analysis, but never as the sole criterion. Use it alongside other tools, consider the macroeconomic context, study the company’s management and competitive advantages. Book value gives you a snapshot of the balance sheet at a specific moment, but it says nothing about the future. It’s a support for your decisions, not a magic solution to find opportunities.