Lesson 3 of 6
Book value against fair value
Book value is what the net assets cost under accounting rules. Fair value is what they are worth, and there is no reason for the two to agree.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Book value is what the net assets cost under accounting rules, not what they are worth.
- A brand you bought sits on the balance sheet; a brand you built does not, which is one large reason this ratio spreads so widely across the market.
- A buyback above book value raises the ratio mechanically, with the business unchanged.
Price to book compares what the market thinks a business is worth with what the accounts say its net assets cost. Part of the gap is accounting, part is the market's view of the return the company earns on that book.
Where Graham's 1.5x sits among US price to book ratios
Graham's ceiling, 1.5x: between the 25th percentile (1.14x) and the median (2.17x).As a ceiling it admits between a quarter and a half of the cohort.
- 10th percentile: 0.6x
- 25th percentile: 1.14x
- median: 2.17x
- 75th percentile: 5.02x
- 90th percentile: 10.87x
Why the gap exists
The balance sheet records what was paid for, not what was built. A brand grown over decades of advertising carries nothing on the books. Acquire the same brand instead, and the price paid above the target's other assets becomes goodwill, recorded at once. The accounts capitalise a brand you bought and expense one you built, and that asymmetry is one of the largest reasons price to book ratios spread so widely.
Which book value
Price to book and price to tangible book are different multiples routinely quoted under the same name.
For a company that grew organically the two are close. For one that grew by acquisition, price to tangible book is the version that answers what would be left if everything bought rather than built were written off.
A buyback moves the ratio, not the business
A buyback at three times book
- Before, price to book3.00x
- After ten shares bought back at 303.86x
The company has 100 shares and 1,000 of book equity. Ten shares were bought at 30, so 300 of cash left and 300 of book equity went with it. Book value per share fell from 10.00 to 7.78 while the share price stayed at 30.00. The business is identical on both sides; the multiple moved by 29 percent. Run that for a decade and book equity can cross zero, which is negative equity from capital returned to shareholders, not from losses.
Graham's rule, and what it excludes today
Graham's defensive criterion capped price at 1.5 times book, relaxed by a combined test: price to earnings times price to book not exceeding 22.5. The market's own numbers show why the rule now filters something different than it once did. Across the 536 US companies in Financial Services, the median price to book on 2026-09-07, from prices last stored 2026-08-26, was 1.35x; across the 495 in Technology it was 3.82x. A bank's balance sheet already holds most of what the bank is. A software company's balance sheet holds almost none of what it sells, because the product was expensed on the way to existing. Applied today, the 1.5x rule screens out asset-light businesses more than it screens out expensive ones.
Check yourself
Why does an internally built brand carry no value on the balance sheet while an acquired one does?
- Accounting rules ignore brands entirely
- Building it was expensed as incurred; buying it is recorded as goodwill at the purchase price
- Only acquired companies own brands
Show the answer
Answer: B.
The accounts capitalise what was paid for in a transaction and expense what was spent building it internally, which is one large source of the spread in this ratio.A company buys back shares above book value. What happens to its price to book ratio, with nothing else changing?
- It falls
- It rises
- It stays the same
Show the answer
Answer: B.
The buyback takes the same 300 out of book equity and out of market value, but 300 is a larger share of book than of market value, so the ratio rises with the business unchanged.Graham's ceiling of 1.5 times book sits where in the US market's price to book distribution?
- Below the 10th percentile
- Between the 25th percentile and the median
- Above the 90th percentile
Show the answer
Answer: B.
At 1.14 for the 25th percentile and 2.17 for the median, 1.5 sits between them, so as a ceiling it admits between a quarter and half of the cohort.Sources
- Graham, The Intelligent Investor, revised edition 1973, chapter 14, on the defensive investor's criteria.
- ASC 350, Intangibles, Goodwill and Other.
- The price to book distribution published on the open research pages of ValueScreener, built 2026-09-07.
What this leaves out
- The distribution was built 2026-09-07 from prices last stored 2026-08-26, and is rebuilt on a schedule, so later breakpoints will differ.
- This lesson treats book value as reported. It does not cover the measurement rules behind individual assets.
- Nothing here says what level of price to book is cheap. The worked examples use round invented numbers so the arithmetic can be checked.
- Nothing here is advice about any security.