Book Value per Share: Meaning, Formula & Basics

You need to find the company’s balance sheet to obtain total assets, total liabilities, and outstanding shares. Most investment websites display this financial report under a “financials” tab—some show it on a stock’s summary tab. Tangible book value (TBV) of a company is what common shareholders can expect to receive if a firm goes bankrupt—thereby forcing the liquidation of its assets at the book value price. Intangible assets, such as goodwill, are not included in tangible book value because they cannot be sold during liquidation. However, companies with high tangible book values tend to offer shareholders more downside protection in the case of bankruptcy.

  1. The Book Value of a company is equal to their shareholders (or stockholders’) equity, and reflects the difference between the balance sheet assets and the balance sheet liabilities.
  2. Total annual return is considered by a number of analysts to be a better, more accurate gauge of a mutual fund’s performance, but the NAV is still used as a handy interim evaluation tool.
  3. This means the book value per share calculation can begin with finding the necessary balance sheet data.
  4. There are a number of other factors that you need to take into account when considering an investment.

With common stock factored into the denominator, the ratio reflects the amount a common shareholder would acquire if or when the particular company is liquidated. It depends on a number of factors, such loan meaning as the company’s financial statements, competitive landscape, and management team. Even if a company has a high book value per share, there’s no guarantee that it will be a successful investment.

As companies acquire new assets, those assets are recorded on the balance sheet at their cost. If a manufacturer buys assembly equipment for $20 million, it records that equipment at a book vaue of $20 million. Companies accumulate ownership of various types of assets over time, all recorded in their financial statements.

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.

The Difference Between Market Value per Share and Book Value per Share

But be sure to remember that the book value per share is not the only metric that you should consider when making an investment decision. The book value is used as an indicator of the value of a company’s stock, and it can be used to predict the possible market price of a share at a given time in the future. If a company’s share price falls below its BVPS, a corporate raider could make a risk-free profit by buying the company and liquidating it. If book value is negative, where a company’s liabilities exceed its assets, this is known as a balance sheet insolvency. EPS, or earnings per share, measures net income as a percentage of a company’s outstanding shares.

What are the Factors Influencing Book Value?

Significant differences between the book value per share and the market value per share arise due to the ways in which accounting principles classify certain transactions. 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. 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. If XYZ can generate higher profits and use those profits to buy more assets or reduce liabilities, the firm’s common equity increases. If, for example, the company generates $500,000 in earnings and uses $200,000 of the profits to buy assets, common equity increases along with BVPS. On the other hand, if XYZ uses $300,000 of the earnings to reduce liabilities, common equity also increases. The market value per share is a forward-looking metric unlike the book value per share which is calculated using historical costs.

If a company owns assets, it includes them in the balance sheet to maintain accurate accounting records. The price of a single publicly traded stock divided by the number of shares outstanding gives us the market price per share. While BVPS is set at a certain price per share, the market price per share varies depending purely on supply and demand in the market. The denominator is book value per share, and the example is known as the price to book value (P/B). The market price, as opposed to book value, indicates the company’s future growth potential. When computing ROE on a per-share basis, book value per share is also utilized in the calculation.

What does it mean if BVPS is greater than the price per share?

The total assets for ABC Ltd amount to Rs. 77,50,000, while the total liabilities amount to Rs. 32,00,000. To calculate the book value, we subtract the total liabilities from the total assets i.e. This represents the net value of the company’s assets after deducting all its liabilities. A company can use a portion of its earnings to buy assets that would increase common equity along with BVPS.

How do companies increase their BVPS?

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. 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.

Stocks are deemed cheap if their BVPS is greater than their current market value per share (the price at which they are currently trading). Book value per share (BVPS) is calculated as the equity accessible to common shareholders divided by the total number of outstanding shares. This number calculates a company’s book value per share and serves as the minimal measure of its equity.

If XYZ uses $300,000 of its earnings to reduce liabilities, common equity also increases. It compares a share’s market price to its book value, essentially showing the value given by the market for each dollar of the company’s net worth. High-growth companies often show price-to-book ratios well above 1.0, whereas companies facing financial distress occasionally show ratios below 1.0. Another valuable tool is the price-to-sales ratio, which shows the company’s revenue generated from equity investments. Book value refers to the ratio of stockholder equity to the number of shares outstanding. It takes into account only the accounting valuation, which is not always an accurate reflection of the current market valuation, or of what could be received during a sale.

This is why it’s so important to do a lot of research before making any investment decisions. There are a number of other factors that you need to take into account when considering an investment. For example, the company’s financial statements, competitive landscape, and management team. You also need to make sure that you have a clear understanding of the risks involved with any potential investment. Preferred stock is usually excluded from the calculation because preferred stockholders have a higher claim on assets in case of liquidation.

Stockholders’ equity is represented by book value per share, which may be seen at the top of this page. Some investors may use the book value per share to estimate a company’s equity-based on its market value, which is the price of its shares. If a business is presently trading at $20 but has a book value of $10, it is being sold for double its equity. When searching for undervalued stocks, investors should consider multiple valuation measures to complement the P/B ratio. As explained earlier, companies also use share repurchases (buybacks) from existing shareholders to increase their BVPS.