Translation: Book Value = Book Value

Book Value — also known as Net Asset Value — is the net value of a company’s assets or a stock based on the figures and data recorded in the official financial statements. It represents the actual amount of money shareholders would receive if the company were fully liquidated, all its assets sold, and all its outstanding debts and liabilities paid.

Simple definition: It is "the value of your car in the registration and accounting records, not its current market price at car dealerships." In other words, it is a value calculated using invoices and accounting records, away from fluctuations and speculation in market prices.


Calculation method:

  1. Company book value: Book Value = Total Assets - Total Liabilities
  2. Book value per share: Book Value per Share = Total Shareholders’ Equity ÷ Number of Outstanding Shares

Note: The fundamental difference between book value and market value lies in the fact that the latter changes daily according to supply and demand and investors’ expectations regarding the company’s future performance, whereas book value is calculated periodically based on historical purchase cost, after deducting depreciation and accumulated earnings.

Example:

Suppose there are two companies in the same sector, Company A and Company B, and the book value per share of each is SAR 10.

  • (Company A): Trades at SAR 8 in the financial market.
  • (Company B): Trades at SAR 30 in the financial market.

Result:

  • (Company A) trades at a discount to its book value, with a price-to-book ratio of less than 1. This may mean that the stock is undervalued or that the market perceives high risks in its assets.
  • (Company B) trades at a price-to-book ratio of 3 times, which means that investors have high confidence in its future growth prospects and are willing to pay considerably more than the value of its recorded assets.

What does this mean for you?

  • A measure of safety: It helps you identify the stock’s "financial floor"; stocks trading at prices close to their book value offer value investors a greater margin of safety.
  • Evaluating management performance: The accumulation and growth of book value year after year reflects the company management’s success in retaining earnings and reinvesting them effectively to grow equity assets.
  • Not suitable for some sectors: It is highly accurate and useful when evaluating banks and real estate and industrial companies with tangible assets, while it is less reliable for technology and service companies that depend on intangible assets, such as software and brands.

Frequently asked question: If a stock’s market price is lower than its book value, does that necessarily mean it is an irreplaceable investment opportunity?

Answer: Not always. The low price may indicate an opportunity, with the stock undervalued, but it may often be a "Value Trap," reflecting the market’s view that there are operational problems, poor assets that cannot be sold for their recorded value, or risky debts threatening the company.