The Book Value Per Share (BVPS) is a ratio that measures the total shareholders’ equity against the number of shares outstanding. In other words, this ratio measures the total assets of the company, minus total liabilities, on a per-share basis.
What is Book Value Per Share?
Book value per share is one way to assess the value of a stock. To better understand book value per share, it’s helpful to break down each aspect of the ratio.
Book value is the total shareholders’ equity, or net asset value, of the company. Since publicly traded companies are owned by shareholders, this is also known as total shareholders’ equity. Book value includes all equipment and real estate owned by the company, as well as any cash or inventory available. Book value also accounts for all of the company’s financial liabilities, such as debts or tax obligations. To calculate book value, all of those liabilities must be subtracted from the total assets of the company. You will find these values on the company’s financial statements.
Note: The company must account for the value of each asset it owns. The book value of an asset is calculated by subtracting depreciation from the asset’s purchase value. Depreciation is generally an estimate, and there are different methods for calculating depreciation.
How to Calculate Book Value Per Share?
To calculate book value per share, you must first calculate the book value, then divide it by the number of common shares outstanding. Also, since you are working with common stock, preferred shareholder equity must be subtracted from total shareholders’ equity. Otherwise, the book value per share would be overstated and inaccurate.
Note: It is important to use the average number of shares outstanding in this calculation. A short-term event, such as stock buybacks, can impact end-of-period values, which will affect the results and reduce their reliability.
How Does Book Value Per Share Work?
Generally, investors (especially value investors) use book value per share to determine whether a stock is fairly valued. If the book value per share is less than the stock price, it means the investor may consider the stock to be overvalued – costing more than its underlying assets are worth. Conversely, when the book value per share is greater than the stock price, it indicates that the investor can simply buy a stake in the company’s assets for less than the actual value of those assets.
Note: Comparing book value per share to the market price of the stock is known as the market-to-book ratio or price-to-book ratio.
Limitations of Book Value Per Share
One limitation of book value per share is that it does not tell you much by itself as an investor. Investors should compare book value per share with the market price of the stock to start analyzing how it affects them.
Another limitation is that book value per share is a conservative analysis of the company. It simply measures the company’s current financial position. This does not allow for growth estimates.
Book value also favors companies with tangible assets. Companies that keep inventory in warehouses can count all that inventory in book value. However, technology companies that specialize in software creation do not have a stored asset somewhere and don’t require expensive industrial equipment to produce their product. These companies may generate sales through that software, but there is no warehouse full of software code for investors to look at to estimate future sales.
Takeaway
Book value per share is a ratio that compares a company’s net asset value, minus preferred shareholders’ equity, to the total number of common shares available in the market. The information needed to calculate book value per share can be found on the company’s financial statements. Comparing book value per share with the market price of the stock may help value investors identify investment opportunities.
Source:
https://www.thebalancemoney.com/what-is-the-book-value-per-share-financial-ratio-393214
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