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Unlike market capitalization, which measures a company’s total equity value based on its current share price, book value per share (BVPS) is a way to calculate a company’s total assets minus liabilities, and divide that total by the number of outstanding shares to get a more accurate gauge of its share price.
Thus, BVPS can be useful when deciding whether a stock is overvalued or undervalued. For example, the book value per share of an undervalued stock would be higher than its current market price, so knowing the BVPS can help investors better assess stock prices.
Key Points
• Book value per share (BVPS) is a financial metric that calculates a company’s total assets minus liabilities, divided by the number of outstanding shares.
• BVPS helps investors assess whether a stock is overvalued or undervalued by comparing it to the company’s current market price.
• A BVPS higher than the current market price can indicate that a stock is undervalued, while a declining BVPS may signal a potential stock price decrease.
• BVPS theoretically represents what shareholders would receive if a company were liquidated after all assets were sold and liabilities paid.
• Companies can increase their BVPS by repurchasing common stocks or by increasing assets and reducing liabilities using profits.
What Is Book Value Per Share?
Book value per share (BVPS) is the ratio of a company’s equity available to common shareholders relative to the number of outstanding company shares.
Using BVPs helps investors assess whether a stock price is undervalued or overvalued by comparing it to the firm’s market value per share (more on that below). BVPS represents what shareholders would likely receive if the firm was liquidated and its assets sold and its debts were paid.
This ratio calculates the minimum value of a company’s equity and determines a firm’s book value, or net asset value (NAV), on a per-share basis. In other words, it defines the accounting value (i.e. book value) of a share of a company’s publicly traded stock.
Book Value Per Share vs Market Value Per Share
The book value per share provides information about how the value of a company’s stock compares to the current market value per share (MVPS), or current stock price. For example, if the BVPS is greater than the MVPS, the stock market may be undervaluing a company’s stock.
The market value per share is a more complex measurement that includes metrics such as the price-to-earnings ratio. It’s forward-looking, since it’s based on what investors think a company should be worth.
Recommended: Intrinsic Value vs Market Value, Explained
What Does Book Value Per Share Tell You?
Commonly used by stock investors and analysts, the book value per share (BVPS) metric helps investors determine whether it’s undervalued compared to the stock’s current market price.
An undervalued stock will have a BVPS higher than its current stock price, which can help investors make decisions when they buy stocks online.
If the company’s BVPS increases, investors may consider the stock more valuable, and the stock’s price may increase. On the other hand, a declining book value per share could indicate that the stock’s price may decline, and some investors might consider that a signal to sell the stock.
Book value per share also theoretically reflects what shareholders would receive in a company liquidation after all its assets were sold and all of its liabilities paid.
BVPS Can Indicate a Vulnerability
If a company’s share prices dip below its BVPS, the company can potentially be vulnerable to a hostile takeover by a corporate raider who could buy the company and liquidate its assets risk-free.
Conversely, a negative book value could indicate that a company’s liabilities exceed its assets, making its financial condition “balance sheet insolvent.”
Understanding Preferred Shares
Book value per share solely includes common stockholders’ equity and does not include preferred stockholders’ equity. This is because preferred stockholders are ranked differently than common stockholders in the event the company is liquidated.
If a corporate raider intends to liquidate a company’s assets, the preferred stockholders with a higher claim on assets and earnings than common shareholders are paid first and that amount gets deducted from the final shareholders’ equity distributed among common stockholders.
Recommended: Stock Market Basics
How to Calculate Book Value Per Share
Whereas some price models and fundamental analyses are complex, calculating book value per share is fairly straightforward. At its core, it’s subtracting a company’s preferred stock from shareholder equity and dividing that sum by the average amount of outstanding shares.
Book Value Per Share = (Total Equity – Preferred Equity) / Total Shares Outstanding
Total Equity = Total equity of all shareholders.
Total Shares Outstanding = Company’s stock currently held by all shareholders.
Example of Book Value Per Share
Company X has $10 million of shareholder equity, of which $1 million are preferred stocks and an average of 3 million shares outstanding. With this information, the BVPS would be calculated as follows:
BVPS = ($10,000,000 – $1,000,000) / 3,000,000
BVPS = $9,000,000 / 3,000,000
BVPS = $3.00
How to Increase Book Value Per Share
A company can increase its book value per share in two ways.
Repurchase Common Stocks
A common way of increasing BVPS is for companies to buy back common stocks from shareholders. This reduces the stock’s outstanding shares and decreases the amount by which the total stockholders’ equity is divided.
For example, in the above example, Company X could repurchase 500,000 shares to reduce its outstanding shares from 3,000,000 to 2,500,000.
The above scenario would be revised as follows:
BVPS = ($10,000,000 – $1,000,000) / 2,500,000
BVPS = $9,000,000 / 2,000,000
BVPS = $4.50
By repurchasing 1,000,000 common shares from the company’s shareholders, the BVPS increased from $3.00 to $4.50.
Increase Assets and Reduce Liabilities
Rather than buying more of its own stock, a company can use profits to accumulate additional assets or reduce its current liabilities. For example, a company can use profits to either purchase more company assets, pay off debts, or both. These methods would increase the common equity available to shareholders, and hence, raise the BVPS.
The Takeaway
There are many methods that investors can use to evaluate the value of a company. By leveraging formulas such as a company’s book value per share, investors can assess a company’s value relative to its current market price.
While it has limitations, the BVPS can help identify companies that are undervalued (or overvalued) according to core fundamental principles, and it’s a relatively straightforward calculation that even beginner investors can use.
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FAQ
What does BVPS tell an investor?
Book value per share gives investors the company’s net value on a per share basis. It’s a way of evaluating a company’s share price before making a trade.
Is a higher BVPS better?
A higher book value per share than the market share price tells investors that the company seems to be well-funded and the stock may be a bargain (i.e., undervalued).
What is book value vs market value?
The book value is the net value of a company’s assets, as shown on its balance sheet. Book value per share, then, is the per-share price that reflects the book value. The market value is what the market is willing to pay per share, and is a more complex calculation that’s reflected by the market price.
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