What is book value or breakup value?

Book value — often called breakup value on the PSX — is the accounting value of a company's equity per share. It represents what shareholders would, in theory, be left with if the company sold all its assets at the values in its accounts and paid off all its liabilities. The formula is:

Book value per share = (total assets − total liabilities) ÷ number of shares.

The numerator, total assets minus total liabilities, is the company's shareholders' equity (also called net worth). Dividing by the share count gives the equity backing each share. If a company has Rs 50 billion of equity and 1 billion shares, its book value is Rs 50 per share.

Book value provides a sense of a company's underlying net worth, independent of the market's mood. While the share price reflects sentiment and expectations and can swing daily, book value changes only as the company earns profits (which add to equity), pays dividends (which reduce it), or revalues assets.

Investors most often use book value through the price-to-book (P/B) ratio, which compares the market price to book value per share:

- A P/B below 1 means the stock trades for less than its accounting net worth. This can flag a bargain — or signal that the market doubts the asset values or expects poor returns. - A P/B above 1 means investors value the company at a premium to its book net worth, usually because they expect it to earn good returns on those assets.

Book value is particularly useful for asset-heavy businesses such as banks, insurers, and industrial companies, where the balance sheet genuinely reflects the value of the business. For banks especially, P/B is a favourite metric on the PSX. It is less useful for asset-light businesses — technology or services firms whose value lies in brands, software, or people rather than physical assets the accounts capture.

Some cautions:

- Accounting, not market, values. Book value reflects historical cost and accounting rules; the real-world sale value of assets could be higher or lower. - Pair it with returns. A low P/B is only attractive if the company can earn a decent return on equity (ROE) on that book value. Cheap assets that earn nothing are not a bargain.

For value-oriented PSX investors, book value — and the price-to-book ratio — is a core tool, especially for banks and industrials, best used alongside ROE and earnings to judge whether a low valuation is opportunity or warning.