The accounting equity attached to each share of a company is found by taking its net worth from the balance sheet, which is total assets minus total liabilities, and dividing it by the shares outstanding, meaning the shares held by all shareholders. This per share figure is the book value of a share.
Net worth is also called shareholders' equity or net asset value, and these names are used for the same figure. On the balance sheet, this equity includes the share capital paid in by shareholders, the reserves of the company, and its retained earnings which are profits kept in the business instead of being paid out as dividends.
Dividing net worth by shares from filed results
Listed companies in India file quarterly results with BSE and NSE under SEBI is the statutory regulator of India's securities market, with the legal duty to protect investors and to promote and regulate that market. Read the full meaning of SEBI listing rules, and shareholders' equity is read from the balance sheet filed with the half-yearly results. Investors then divide this net worth by the shares outstanding.
Some versions subtract the preferred equity first, so that only common shareholders' equity is counted, while the tangible version leaves out the intangible assets.
For a hypothetical company with a net worth of Rs 1,000 crore and 10 crore shares outstanding, there will be a book value of Rs 100 per share.
The figure rests on historical cost less depreciation, so land bought decades ago can be worth far more than its book figure.
Book value feeds price to book, but is not face value
Investors divide the market price of a share by its book value per share to get the price to book (P/B) ratio.
It is most useful for asset heavy sectors such as banking, real estate and infrastructure, where book value is close to real worth. In other sectors, book value can lag market value, so the ratio tells less.
Book value is not face value. Face value is the nominal value of a share, fixed when it is issued, while book value comes from the balance sheet and changes as the company's equity changes.