What is Book Value Per Share (BVPS)?
Book value per share (BVPS) is a ratio used to compare a firm’s common shareholder’s equity to the number of shares outstanding. In the case that the firm dissolves, it is the amount the shareholders will receive.
If a corporation does not have preferred stock outstanding, the book value per share of stock is a corporation’s total amount of stockholders’ equity divided by the number of common shares of stock outstanding on that date.
For example, if a corporation without preferred stock has stockholders’ equity on December 31 of $12,421,000 and it has 1,000,000 shares of common stock outstanding on that date, its book value per share is $12.42.
Keep in mind that the book value per share will not be the same as the market value per share. One reason is that a corporation’s stockholders’ equity is simply the difference between the total amount of assets reported on the balance sheet and the total amount of liabilities reported. Noncurrent assets are generally reported at original cost less accumulated depreciation and some valuable assets such as trade names might not be listed on the balance sheet.
What Does Book Value per Share Mean?
Book value per share is the ratio of stockholder equity to the average number of common shares. Book value per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation (and not necessarily market valuation).
Book value per share is broadly used in relative valuation and usually to compare a firm’s market value per share. If a firm’s BVPS is higher than its market value per share, then the stock is undervalued, which means that it trades lower than the price that the market determines.
Therefore, the BVPS can determine if a stock is undervalued or overvalued and it helps investors understand how a stock behaves. To calculate the book value per share formula, we need to know the common shareholder’s equity, the amount of preferred stocks and the number of shares outstanding.
Concept of Book Value per Share
Book value per share is just one of the methods for comparison in valuing of a company. Enterprise value, or firm value, market value, market capitalization, and other methods may be used in different circumstances or compared to one another for contrast. For example, enterprise value would look at the market value of the company’s equity plus its debt, whereas book value per share only looks at the equity on the balance sheet. Conceptually, book value per share is similar to net worth, meaning it is assets minus debt, and may be looked at as though what would occur if operations were to cease. One must consider that the balance sheet may not reflect with certain accuracy, what would actually occur if a company did sell all of their assets.
How Do You Calculate Book Value per Share?
To calculate the book value per share, you must first calculate the book value, then divide by the number of common shares. Also, since you’re working with common shares, you must subtract the preferred shareholder equity from the total equity. Otherwise, the book value per share would be inflated and inaccurate.
The formula for book value per share is to subtract preferred stock from stockholders’ equity, and divide by the average number of shares outstanding. Be sure to use the average number of shares, since the period-end amount may incorporate a recent stock buyback or issuance, which will skew the results. The formula is as follows:
Book value per share = (Stockholders' Equity - Preferred Stock) ÷ Average shares outstanding
Market Value Per Share vs. Book Value Per Share
The book value per share and the market value per share are some of the tools used to evaluate the value of a company’s stocks. The market value per share represents the current price of a company’s shares, and it is the price that investors are willing to pay for common stocks. The market value is forward-looking and considers a company’s earning ability in future periods. As the company’s expected growth and profitability increase, the market value per share is expected to increase further.
On the other hand, book value per share is an accounting-based tool that is calculated using historical costs. Unlike the market value per share, the metric is not forward-looking, and it does not reflect the actual market value of a company’s shares.
The BVPS is a conservative way for investors to measure the real value of a company’s stocks, which is done by calculating what stockholders will own when the company liquidates and all debts paid up. Value investors prefer using the BVPS as a gauge of a stock’s potential value when future growth and earnings projections are less stable.
Limitations of Book Value per Share
One limitation of book value per share is that, in and of itself, it doesn’t tell you much as an investor. Investors must compare the BVPS to the market price of the stock to begin to analyze how it impacts them.
Another limitation is that BVPS is a conservative analysis of a company. It simply measures the present financial standing of the company. That doesn’t allow for growth estimates.
Book value also favors businesses with physical assets. Companies that store inventory in a warehouse can count all of that inventory toward their book value. However, tech companies that specialize in creating software don’t have an asset that is stored somewhere, and they don’t require expensive industrial equipment to produce their product. They may generate sales with that software, but there isn’t a warehouse full of software code that investors can look at to gauge future sales.