Check These Key Numbers

How does the price relate to book value?

Simply put, a company's book value is the difference between its assets and its liabilities -- what it owns and what is owed to it, minus what it owes to others.

This is sometimes referred to as shareholder's equity.

Dividing book value by the number of outstanding shares gives you the book value per share.

Theoretically, book value represents the amount stockholders would receive for each share they own if the company were to shut down, sell all its assets, pay all its debts and go out of business. (Few companies whose shares are widely traded ever shut down, but the list of bankruptcies that dot the history of American business makes the point: Stuff happens.)

Stocks may be recommended as cheap because they are selling below book value or very little above.

Such stocks sometimes become takeover candidates, attracting the attention of other companies, which see a chance to buy them up on the cheap -- and that can drive up the price of the shares and thus reward investors who spotted the bargain sooner.

However, it's possible that a company's stock is selling below book value not because it is an undiscovered bargain but because that company or its industry has fallen on hard times.

You should have more information to go on before you start buying.

What's the return on equity?

A company's total annual net (after-tax) income, expressed as a percentage of total book value, measures how much the company earns on the stockholders' stake in the enterprise.

Return on book value, also called return on equity, varies from company to company and from industry to industry, and it fluctuates with economic conditions.