Introduction
At the start of February 2025, Home Depot's balance sheet showed shareholders' equity of $6.6 billion. Six months earlier, its own annual report records, the shares held by investors outside the company were worth about $356.9 billion. The market was valuing the company at more than fifty times its accounting equity. That gap is not a sign that the accounts are wrong or the market irrational. It reflects what each number measures.
Book value is the shareholders' equity on the balance sheet: assets minus liabilities, measured under accounting rules that rely mostly on historical cost. Market value, or market capitalization, is the share price multiplied by the shares outstanding: what investors collectively pay today for a claim on all future cash flows. The two answer different questions, and the ratio between them, price-to-book, means something useful only in particular industries.
Why the Two Numbers Diverge
The gap between book and market value comes from a handful of features of accounting, each of which pushes book value away from economic value:
- Historical cost: property, plant and equipment, inventory and acquired intangibles are recorded at what was paid, less depreciation, amortization and write-downs, and are not written up when their value rises.
- Unrecorded intangibles: brands, customer relationships, research, data and know-how built internally are expensed as the money is spent, so they never appear as assets; only narrow costs, such as part of the cost of developing software, are capitalized.
- Buybacks recorded at cost: shares repurchased at prices far above book value reduce equity by the full price paid, shrinking book value while the remaining shares stay valuable.
- Expectations: market value reflects expected future growth and profitability, which no balance sheet records.
- Market moves: share prices change daily with interest rates and sentiment, while book value changes slowly.
Some of these causes reduce book value below economic value, as with unrecorded brands; others shrink book value without changing the business at all, as with buybacks, whose effect on each equity account is explained in shareholders' equity. Where equity sits in the overall structure of the balance sheet is shown in how the balance sheet works.
Price-to-Book and Return on Equity
The price-to-book ratio is linked to two other numbers by a simple identity: price-to-book equals price-to-earnings multiplied by return on equity, because earnings divided by book value is return on equity. A company earning a 20% return on equity and trading at 15 times earnings trades at three times book value. That identity explains why high price-to-book ratios usually belong to companies with high returns on equity, either because their businesses earn genuinely high returns on little recorded capital, or because buybacks have shrunk the equity base, and why the ratio says little on its own without the return that produces it.
The intangibles gap has been documented for decades. A study published by the National Bureau of Economic Research, What Is a Company Really Worth?, notes that the average price-to-book ratio for S&P 500 companies ranged from about 2.0 to 3.5 in the early 1990s and from 3.5 to 7.5 in the late-1990s technology boom, a gap the authors argue is too large to attribute to mismeasured conventional equity alone, pointing to the absence of intangible assets from balance sheets. Which balance sheet items sit at cost and which at fair value is set out in historical cost vs fair value.
- Price-to-book ratio
Market capitalization divided by shareholders' equity, or share price divided by book value per share. A ratio above one means investors value the company above its accounting net assets; below one, below them.
Four Companies, Four Very Different Gaps
The 10-K cover page discloses the aggregate market value of shares held by non-affiliates, close to market capitalization, at the end of the company's second fiscal quarter. Comparing it with book equity at the following year end gives an approximate picture of each gap:
| Company | Market value of non-affiliate shares | Book equity at following year end | Approximate ratio |
|---|---|---|---|
| Home Depot | $356.9 billion (July 26, 2024) | $6.6 billion (Feb 2, 2025) | Over 50x |
| Coca-Cola | $272.0 billion (June 28, 2024) | $24.9 billion (Dec 31, 2024) | About 11x |
| Intel | $132.4 billion (June 28, 2024) | $99.3 billion (Dec 28, 2024) | About 1.3x |
| McDonald's | $182.8 billion (June 28, 2024) | Negative $3.8 billion (Dec 31, 2024) | Not meaningful |
Each gap has a different cause. Home Depot and McDonald's have spent decades buying back shares at prices far above book value, shrinking or eliminating their equity. Coca-Cola's brand, its most valuable asset, is not on its balance sheet at all, and its equity is also reduced by buybacks and currency losses. Intel, by contrast, traded close to its book value in 2024, because the market expected its large investments in factories to earn returns not much above their cost. Each figure comes from the company's own annual report, such as Intel's 2024 Form 10-K.
When Book Value Matters
For most industrial, consumer and technology companies, bankers value businesses on earnings and cash flow, and book value plays little role. It matters in a few specific settings.
Banks and Insurers
Financial institutions hold assets, mostly loans and securities, whose carrying amounts are closer to economic value than a manufacturer's plant, and their capacity to grow is limited by regulatory capital, which starts from book equity. Bankers therefore value banks on price to tangible book value, removing goodwill and intangibles that cannot absorb losses, alongside price-to-earnings. A bank earning a return on tangible equity above its cost of equity trades above tangible book; one earning less trades below it. The valuation approach is covered in the Valuation guide's article on financial institutions valuation.
- Tangible book value
Shareholders' equity minus goodwill and other intangible assets, sometimes also excluding preferred equity. It measures the net assets that could absorb losses or be realized in a sale, and is the basis of price-to-tangible-book multiples used for banks.
Asset-Heavy Businesses and Distress
For real estate companies, investment holding companies and some natural resource businesses, the value of the underlying assets can be estimated directly, so analysts compare market value with a net asset value built from current values rather than book. In restructurings and liquidations, the realizable value of assets, often below book, decides what creditors recover.
Acquisitions
In an acquisition, the gap between the price paid and the target's book value has to be explained in the accounts. The buyer remeasures the target's assets and liabilities at fair value, recognizes previously unrecorded intangibles such as brands and customer relationships, and records the remainder as goodwill, so the buyer's balance sheet carries a value much closer to the price paid than the target's own book value did. How that allocation works is covered in purchase price allocation.
Reading Book Value as a Banker
Book value is best read as a record of capital allocation rather than a measure of worth. Its components show how much shareholders contributed, how much profit was retained, how much was returned through buybacks and how much was lost to currency or impairments. Market value then shows what investors believe that capital will earn in the future. Where the two are close, the market expects ordinary returns on the capital invested; where market value is far above book, it expects the business to earn well above its cost of capital on assets the accounts barely record; and where it is below, it doubts that the recorded assets will earn their keep. That interpretation, rather than the ratio itself, is what makes the comparison useful.
