Book value (BV) of the company is basically the total assets of the company attributable to the shareholders.
The rise in shareholder’s equity increases the book value of the company (which is basically the total assets that the company owns – the total liabilities that the company owes).
As a company generates profits and retains it, the reserves and surplus on the balance sheet goes up. This increase in the reserves and surplus, reflects in the increase of shareholder’s equity.
The increased BV implies that the shareholder’s wealth has increased. Most companies trade at multiples to book value – which in turn is the function of expected growth in the book value of the company (which in turn is a function of expected increase in revenues and/or the profitability of the company).
A company which is expected to grow at a rapid rate will have a higher multiple as the BV is expected to grow at a much faster rate in future implying higher share price.
An investor should ideally look at the BV growth projections and history (which in turn is a function of the revenue growth/ profitability and free cash flow generation) to decide on whether the stock is investable or not.
Companies which generate higher cash flows will be able to increase their value much faster leading to higher shareholder returns.
