The book value per share formula and calculation is a metric used to compare the market value of a firm per share. This ratio is used by investors to gauge whether a stock is undervalued.
What is book value per share (BVPS)?
Book value per share (BVPS) is the ratio of the book value of equity against the number of shares outstanding. The “share” aspect in this ratio refers to the common shares of the company which can be bought or sold on an exchange. This means the ratio is calculated as the book value per share of common stock.
The book value per share meaning is simply the minimum value of a company’s equity that weighs the book value of a firm on a per-share basis. The net asset value or total equity of a company is its book value. This is known as the total shareholders’ equity because public companies are owned by shareholders. Therefore, the book value of a company would include every piece of equipment and property owned by the company. It also includes any inventory or cash holdings on hand.
Nevertheless, to get the book value, the liabilities of the company must be subtracted from the total assets of the company. The company’s liabilities include things like tax burdens or debt. After subtracting such liabilities, the book value is gotten which is found on the company’s balance sheet.
BVPS in the share market weighs stockholders’ total equity against the number of outstanding shares. These outstanding shares are the shares in the open market that are held by shareholders. They include shares held by individual shareholders and restricted shares held by the company’s officers and institutional investors. Outstanding shares are indicated as capital stock on the balance sheet of the company. Hence, the BVSP measures the total assets of a company minus its total liabilities on a per-share basis.
A stock is considered undervalued when the BVPS of a company is higher than its market value per share (current stock price). Also, as there is an increase in the book value per share growth of the company, the stock would be considered to be more valuable and the price of the stock would increase. Therefore, the current book value per share of a company is a way of gauging the value of its stocks. Hence, calculating the book value on a per-share basis can help investors decide if the market value of a stock is undervalued or overvalued.
Book value per share interpretation
Book value per share analysis involves taking the ratio of a company’s common equity divided by its number of outstanding shares. Hence, the book value per share interpretation effectively indicates a company’s net asset value (i.e total assets – total liabilities) on a per-share basis.
The BVPS meaning in stock market is the sum that shareholders would get in the event that the company was liquidated after all liabilities have been paid and all tangible assets sold. If the calculation of the book value per share is done with just common stock in the denominator, then it results in a measure of the amount that a holder of common stock would get upon liquidation of the company.
The computation of book value per share helps investors gauge whether a stock price is trading less than the company’s market value per share. Stocks with high book value per share than their market value per share which is the current stock price are considered to be undervalued.
Therefore, when compared to the market value per share, a high book value per share means the stock is undervalued. Such an interpretation can be considered as a good book value per share for investors looking for undervalued stocks to buy. Once the current stock price of a company falls below its book value per share ratio, a corporate raider could make a risk-free profit by purchasing the company and liquidating it. However, when the liabilities of a company exceed its assets, a negative book value per share ratio emerges which is known as a balance sheet insolvency.
Book value per share formula
The BVPS formula involves taking the book value of equity and dividing the figure by the total number of outstanding shares. The value of preferred equity claims should also be subtracted from the total equity to give us the numerator (book value of equity) of the book value per share formula.
The BVPS formula is expressed as,
BVPS= (Total Equity − Preferred Equity) / Total shares outstanding
It can also be expressed as,
BVPS= (Shareholders’ Equity – Preferred Equity) / Weighted average of common shares outstanding
The book value of equity which is often called the shareholders’ equity is the value of a company’s assets as if all of its assets were liquidated to pay off its liabilities. This means that the amount of cash that remains when all outstanding liabilities are paid is expressed as the book value of equity.
The shareholders’ equity in the book value per share of common stock formula is therefore what the shareholders get in the company after debts have been paid. The shareholder’s residual claim is the net asset value or book value of the company which is equal to the company’s total assets minus its total liabilities. Most importantly, the preferred stock (preferred equity) is subtracted from the shareholders’ equity to get the equity available to holders of common stocks. This is because holders of preferred stocks have a higher claim on assets and earnings than common shareholders.
The weighted average shares outstanding in the formula is a calculation that takes into account any changes in the number of outstanding shares over a specific reporting period. Meanwhile, the total outstanding shares in the book value per common share formula are the shares in the open market that are held by shareholders. These shares are indicated as capital stock on the balance sheet of the company.
This means the book value per share calculation can begin with finding the necessary balance sheet data. These data can be gotten from the latest financial report such as 10-Q, 10-K, etc. The Form 10-Q is a report that is submitted quarterly by publicly traded corporations to the United States federal Securities and Exchange Commission (SEC) as mandated. The Form 10-K, on the other hand, is submitted annually to the SEC which gives a comprehensive summary of a company’s financial performance.
Book value per share calculation
You can calculate book value per share from the balance sheet because the information needed for this calculation is found in the company’s balance sheet. The book value of a company, for instance, is found on its balance sheet which is calculated as the difference between the company’s total assets and total liabilities, and not its share price in the market.
Hence, a company’s book value per share calculation is done based on common shareholders’ equity in the company. This book value per share calculation is done by subtracting the preferred stock from the stockholders’ equity and then dividing the figure by the number of shares outstanding or the average number of outstanding shares. The average number of outstanding shares is used most times because the amount at the end of a financial year may include a recent stock buyback or issuance which can skew the results.
Calculating the book value per common share shows the value remaining for common shareholders if the company dissolves after all assets are liquidated and all debtors are paid. Here are some examples of how to calculate book value per share:
Book value per share example 1
A manufacturing company, known as ABC has a common equity balance of $10 million and has 1 million common stocks that are outstanding. Calculate the book value per share of ABC.
Using the formula,
BVPS= (Total Equity − Preferred Equity) / Total shares outstanding
(Total Equity − Preferred Equity)= common equity balance= $10 million
Total shares outstanding= 1 million
Therefore, BVPS= $10 million / 1 million outstanding shares
This gives us a BVPS of $10 per share which can be compared to the current price of the stock to know if the stock is undervalued or overvalued.
Example 2 using the BVPS formula
Company XYZ has a total asset balance worth $40 million and total liabilities of $25 million, Calculate its book value per share if the company has preferred equity of $3 million and a weighted average share count of 4 million.
Here is how to find book value per share of company XYZ:
Using the formula,
BVPS= (Shareholders’ Equity – Preferred Equity) / Weighted average of common shares outstanding
Shareholders’ Equity= book value of equity= Total asset- total liabilities
= $40 million- $25 million= $15 million
Preferred Equity= $3 million
The weighted average of common shares outstanding= 4 million
Thus, the BVPS of Company XYZ will be calculated as ($15 million – $3 million) / 4 million shares
This means the BVPS is $3 per share
Book value per share example 3
Let’s calculate the book value per share of a company, given the following information:
The weighted average of common shares outstanding-1.4 billion shares
Retained earnings- $520 million
Common Stock & APIC (additional paid-in capital)- $1 billion
Other comprehensive income- $80 million
First, we have to calculate the book value of the equity of the company. To get the book value of equity, we will have to add all the tangible assets given which include the retained earnings worth $520 million, the common stock & APIC worth $1 billion, and the other income worth $80 million. This will sum up to a book value of $1.6 billion.
We know that BVPS = book value of equity/ common shares outstanding
Hence, the book value per share of this company will be calculated as,
$1.6 billion book value of equity / 1.4 billion common shares outstanding
This will give us a BVPS value of $1.14
How do companies increase their BVPS?
Companies can increase their common equity along with their book value per share by using a portion of their earnings to buy assets. They can also increase their BVPS and common equity by using their earnings to reduce their liabilities. Repurchasing common stocks from shareholders is another way to increase book value per share. Hence, many companies use their earnings to buy back shares.
Profitable reinvestment leads to more cash for companies looking for how to increase their book value of equity per share. Using accumulation of earnings to reduce liabilities can result in a high BVPS and higher book value of equity. For instance, the company ABC in our example 1 has a common equity balance of $10 million with 1 million common stocks that are outstanding. We calculated the book value per share of company ABC as $10 per share.
Now, company ABC can generate higher profits and use its profits to buy more assets or reduce liabilities, in order to increase its common equity. So, if company ABC generates earnings worth $500,000 and then uses $200,000 of the profits to buy assets, the common equity of this company and its BVPS can increase as a result of this. More so, if company ABC uses $300,000 of its earnings to reduce liabilities, its BVPS and common equity can also increase.
As explained earlier, companies also use share repurchases (buybacks) from existing shareholders to increase their BVPS. For instance, company ABC can increase its BVPS by repurchasing common stock from shareholders. Remember from our example, company ABC has 1 million common stocks that are outstanding. Now, let’s assume this company buys back 200,000 shares of stock. This means that 800,000 shares are left outstanding. If the company’s common equity remains at $10 million, the BVPS of company ABC will be calculated as (BVPS= $10 million / 800,000 outstanding shares= $12.50). This proves that buying back stocks increased the BVPS of company ABC from the initial $10 we calculated to $12.50 per share.
Importance of book value per share formula
BVPS compares the amount of stockholders’ equity to the number of outstanding shares. The stock price is considered underpriced if the market value per share is lower than the book value per share. Hence, this ratio is a possible indicator of the value of a company’s stock. BVPS may be factored into a general investigation of what the market price of a share should be. Nevertheless, other factors concerning cash flows, product sales, etc should also be considered. Even though this metric is rarely used internally, it is utilized by investors who are evaluating the price of a company’s stock.
The importance of book value per share formula and calculation is that it serves as an essential tool for value investors. It is a metric that is mostly used by value investors, people like Warren Buffet. Value investors always look for discounts and so make use of the BVPS as a useful tool to purchase a stock at a real value. A stock trading below its book value is a great opportunity for these kinds of investors. They see it as a good chance to buy shares at a price that is actually lower than the stocks’ value.
Book value per share is important because it is a fairly conservative way to measure a stock’s value. It is highly useful for investors to get an actual view of a company’s equity value. As earlier said, any equity or stock trading for less than its tangible book value is a good one for value investors. Book value is good if one wants to get a better grip on the value of a company, based on its internal financials. However, it is not the only metric that can be used. There are other metrics used such as price-to-earnings ratio, debt-to-equity ratio, price-to-book ratio, free cash flow, and PEG ratio.
Limitations of the book value per share formula
One of the limitations of the BVPS formula is that it only considers the book value and fails to incorporate other intangible factors that may increase the market value of a company’s shares even in events of liquidation. Take, for instance, high-tech software companies or banks usually have little tangible assets in relation to their intellectual property and human capital. Hence, in a book value calculation, these intangibles would not always be factored in.
There are majorly two issues to have in mind when using the book value per share as a measure. One of them is that the book value is not forward-looking. The market value per share is a forward-looking measure compared to BVPS. This market value per share measures what the investors believe a company’s shares are worth. Whereas, the BVPS is an accounting measure that is not forward-looking at all.
Another issue associated with the BVPS formula is that it undervalues some assets. A number of assets tend to be undervalued by the book value concept. For instance, a brand’s value may be built over the years through several years of marketing expenditures. This may be the primary asset of the company but doesn’t appear in the book value figure at all. Similar to this, the value of in-house research and development activities could be very high, but in most cases, this expenditure is charged straight to expense. These factors can yield a massively significant difference between book value and market value.
Book value per share vs market value per share
There are significant differences between the book value per share vs market value per share formula. Book value is not the same as market value. However, what these two metrics do is help investors to know whether the bulls or bears are running on the financial markets. It is basically a bull market scenario if the market value of a company is significantly stronger than its book value. Conversely, if the book value of a company is stronger than its market value and these metrics are more tightly bundled together, then the market is more likely to be in a bear market scenario.
The book value per share is a good way to evaluate stocks. It is more of an accounting-based tool that doesn’t necessarily reflect the true market value of publicly traded companies. There are varying accounting models that companies have to figure out book value. These models are not the same and are dependent on C-level management’s discretion.
The market value per share is a forward-looking metric unlike the book value per share which is calculated using historical costs. This metric takes into account a company’s future earning power. This means that there is an increase in the market value per share when a company’s potential profitability or expected growth rate increases. It is the current price of a single share in a publicly traded stock. Hence, the market price per share is not fixed compared to the book value per share. It tends to fluctuate entirely based on market forces of supply and demand.
Is the book value per share of preferred stock the same as the BVPS formula?
The book value per preferred share is calculated by adding the cumulative dividends in arrears with the call price or par value and then the figure gotten is divided by the number of outstanding preferred shares. Whereas, the BVPS formula involves taking the book value of equity and dividing the figure by the total number of outstanding shares. The value of preferred equity claims is subtracted from the total equity to give us the numerator of the book value per share formula.
The shareholders’ equity in the book value per share of the common stock formula is the net asset value or book value of the company which is equal to the company’s total assets minus its total liabilities. Whereas, the book value per preferred share divides the applicable equity by the number of shares. This results in the number of net assets that are owned by each preferred share.
In the BVPS, the preferred stock (preferred equity) is subtracted from the shareholders’ equity to get the equity available to holders of common stocks. This is because holders of preferred stocks have a higher claim on assets and earnings than common shareholders. The BVPS is usually used to negotiate mergers, loan contracts, and acquisitions. During a merger, a baseline price for the common and preferred shares of the business being absorbed have to be calculated by both companies.