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.
Book Value Per Share Example
Ashley has invested in a soda company that is rising in popularity throughout the midwest. As a common shareholder, she wants to know the minimum equity that she would have a claim on. Ashley looks at their stock chart and finds their equity is $9.6 million. Their preferred equity is $3.09 million. She can also see that they have $61.5 million shares outstanding. What would the book value per share be?
Let’s break it down to identify the meaning and value of the different variables in this problem.
- Equity: $9,600,000
- Preferred Equity: $3,090,000
- Outstanding Shares: $61,500,000
We can apply the values to our variables and calculate the book value per share:
BVPS = (9,600,000−3,090,000) ÷ 61,500,000 = $0.11
In this case, the book value per share for this soda company would be $0.11.
With an understanding of what the BVPS means, Ashley can compare this result with how the company is trading on the market. If they are trading below book value, she should watch out. But if they are trading above the book value per share, they would be considered undervalued and would be hotter on the market.
Book Value Per Share Analysis
The book value per share is a finance tool used to assess the current stock price of a company. Ideally, investors are searching for stocks that have not peaked in their value. They want to be able to jump in early to then see the company grow.
If a company was interested in increasing their BVPS amount, they have a couple of options. First, they could work on growing their assets. Can they improve their income to increase cash flow? Next, they can look at reducing their liabilities by selling unnecessary assets or using cash flow to pay down debts. Finally, they can consider a method known as buying back shares. To do this, the company would use some of its earnings to purchase back shares of common stock from the market. Many companies keep a controlling number of shares for themselves already.
As with many other calculations and financial principles, the BVPS should not be the only metric you examine. Just the BVPS will not always give you an accurate indication of a company’s health. You could look at earnings or dividends per share, etc. Additionally, some industries can have a cyclical pattern to them, meaning that sometimes they are doing well while other times they may seem to fall behind. When you’re checking out a specific company, you should be taking the health of the entire industry into account.
Book Value Per Share Conclusion
- The book value per share is the minimum cash value of a company and its equity for common shareholders.
- The formula for book value per share requires three variables: total equity, preferred equity, and total outstanding shares.
- To find the equity, you should subtract the company’s liabilities from its assets.
- Preferred equity is money owed to preferred shareholders that have an invested stake in the company and are paid dividends first at a fixed rate.