I just reviewed a topic that many investors overlook—one that really makes a difference when analyzing stocks: net book value. It’s one of those concepts that sounds technical, but it’s actually quite straightforward once you understand it.

Basically, when we talk about net book value, we’re looking at how much equity a company truly has per share that you own. That is, share capital plus reserves, divided by the number of shares. It sounds simple, but this is where many people get lost: this is not the same as nominal value. Nominal value is set at the time of issuance, but net book value shows you the company’s current reality—how it is right now in its accounting records.

What’s interesting is that this is the foundation of value investing—that investment style that aims to find cheap companies in the stock market, but ones that are actually worth more than what the market is paying. And this is where calculating net book value per share comes into play, because it’s exactly what you need to identify those opportunities.

Let’s put a real example. Imagine a company has assets worth 3.2 billion, liabilities of 620 million, and 12 million shares outstanding. The calculation is simple: you subtract liabilities from assets and divide by the number of shares. It gives you 215 euros per share. That’s your net book value. If the stock trades at 100 euros, it’s expensive. If it trades at 50, it’s cheap.

Now, to really know whether a stock is overvalued or undervalued, there’s the P/VC ratio (Price/Book Value). Dividing the market price by the net book value per share gives you a number: if it’s greater than 1, the stock is expensive relative to its books; if it’s less than 1, it’s cheap. A P/VC of 3.23 means you’re paying almost three times what the balance sheet says. A P/VC of 0.87 means you’re getting the company at a discount.

But here’s the important part: this doesn’t mean the price is going to go up. I’ve seen companies with a P/VC below 1 that have been falling for years. The problem is that the market moves based on expectations, not just what the balance sheet says. If the sector is struggling or the global economy doesn’t support it, the price never rises even if the value in the books is solid.

You also need to watch out for the limitations. Net book value only looks at tangible assets, not intangible ones. That’s why tech companies often have very high P/VC ratios: a software program costs little to create but generates a lot of profit, and that isn’t reflected well in the books. In addition, there’s “creative accounting,” where accountants can dress up the numbers in ways that are technically legal.

The case of Bankia is the perfect example of why you shouldn’t trust this blindly. It went public at a huge discount to its book value, and it was still a disaster. The balance sheet didn’t reflect deeper problems.

So net book value is useful, no doubt. It’s an important part of fundamental analysis. But it’s not a magic solution. Use it as one more tool—along with sector analysis, company management, and future outlooks. A stock that looks cheap on the books is only a good investment if the other factors support it as well.