What is Book Value per Common Share?
Investors and stock owners use book value per share of common stock to show how much money their shares are worth on the books after all debt is paid off. This amount applies if a company disbands and liquidates its assets and uses the assets pay off liabilities, the remaining amount goes to the common shareholders.
The book value per common share is a financial ratio that calculates amount of equity applicable to each outstanding common stock. In other words, this is the equity value of each common stock.
What Does Book Value per Share Mean?
Book value per share is usually used to compute the value or price per share of a company’s stock during liquidation. This makes sense because equity represents the net assets of a business. If all of the assets were sold off and all of the liabilities were paid off, the shareholders would be left with the equity. This is a good starting point to calculate the value of a share of common stock.
Shareholders’ equity is the total equity of a company. This includes both preferred and common equity. Preferred equity has a claim to dividends and assets if a company dissolves over common equity. Total shareholders’ equity will be the last line on the statement of shareholders’ equity. A company will disclose preferred equity in the statement of shareholders’ equity. For example, on the shareholders’ equity section of the balance sheet, the company discloses $100,000 of shareholder equity. Of the $100,000, the company discloses $20,000 of preferred equity.
Determine the total common shares outstanding. Common shares outstanding are shares sold to outside parties. The amount of common shares outstanding is on the company’s stockholders’ equity section of the balance sheet. In our example, the company has 50,000 shares of common stock.
Subtract preferred equity from total shareholder equity to determine available equity to common shareholders. In the example, $100,000 minus $20,000 equals $80,000 of available equity.
Divide the available equity by the common shares outstanding to determine the book value per share of common stock. In our example, $80,000 divided by 50,000 shares equals a book value per share of common stock of $1.60.
Formula and Calculation:
Mostly, the book value is calculated for common stock only. The presence of preferred stock in the total stockholders equity, however, has a significant impact on the calculation. The formulas and examples for calculating book value per share (BVPS) with and without preferred stock are given below:
If company has issued only common stock and no preferred stock:
The calculation of book value is very simple if company has issued only common stock. The net assets i.e, total assets less total liabilities are divided by the number of shares of common stock outstanding for the period.
BVPS = Net assets ÷ Number of shares of common stock outstanding
We know that:
Net assets = Assets – Liabilities Equity = Assets – Liabilities Net assets = Equity
So an alternative and equally acceptable approach is to replace the numerator of the formula by the stockholders’ equity. After such modification we get the following widely used formula to calculate book value per share:
BVPS = Stockholder's equity ÷ Number of shares of common stock outstanding
If company has issued common as well as preferred stock:
If a company has issued common as well as preferred stock, the amount of preferred stock and any dividends in arrears thereon are deducted from the total stockholders equity, the resulting figure is divided by the number of shares of common stock outstanding for the period. This procedure can be summed up in the form of the following formula:
BVPS = (Stockholder's equity - (Preferred stock + Dividends in arrears )) ÷ Number of shares of common stock outstanding
What Does Book Value per Common Share Tell You?
The book value of common equity in the numerator reflects the original proceeds a company receives from issuing common equity, increased by earnings or decreased by losses, and decreased by paid dividends. A company’s stock buybacks decrease the book value and total common share count. Stock repurchases occur at current stock prices, which can result in a significant reduction in a company’s book value per common share. The common share count used in the denominator is typically an average number of diluted common shares for the last year, which takes into account any additional shares beyond the basic share count that can originate from stock options, warrants, preferred shares, and other convertible instruments.
Limitations of Book Value per Common Share
Because book value per share only considers the book value, it fails to incorporate other intangible factors that may increase the market value of a company’s shares, even upon liquidation. For instance, banks or high-tech software companies often have very little tangible assets relative to their intellectual property and human capital (labor force). These intangibles would not always be factored in to a book value calculation.