The book value of a stock is the actual worth of the stock as in company books. That is the net asset of a company after deducting all liabilities divided by the number of Stocks of the company.

By general knowledge you may say that the company shares should be traded at the book value. But as a stock analyst this may not be a fair thing to say.

You need to couple Book Value and EPS to arive at a fair price of a stock.

Take for example, a stock has a book value of 100 and its EPS is 12. Also the company EPS is growing at a rate of 15% per year. This will mean that the company book value will be on rise in future too. So at the end of year 1 we are very sure that the book value will stand at 115, 2nd year 132.25 and so on. So you approximately know that by 4 years the book value will be around 200. Thus when your other investments may be at say 120, your BV will be 200. Thus you may discount the current book value by a fair factor.

Usually a book value is multiplied by a factor of 3-10 depending on the company's growth patterns. Want to Discuss more about Book Value?