Conversely, if the market value per share exceeds BVPS, the stock might be perceived as overvalued. BVPS offers a baseline, especially valuable for value investors looking for opportunities in underpriced stocks. The difference between book value per share and market share price is as follows. As suggested by the name, the “book” value per share calculation begins with finding the necessary balance sheet data from the latest financial report (e.g. 10-K, 10-Q). The figure of 1.25 indicates that the market has priced shares at a premium to the book value of a share. If the market price for a share is higher than the BVPS, then the stock may be seen as overvalued.
What Does Book Value Per Share (BVPS) Tell Investors?
Let’s say that Company A has $12 million in stockholders’ equity, $2 million of preferred stock, and an average of 2,500,000 shares outstanding. You can use the book value per share formula to help calculate the book value per share of the company. For example, let’s say that ABC Corporation has total equity of $1,000,000 and 1,000,000 shares outstanding. This means that each share of stock would be worth $1 if the company got liquidated. To calculate book value per share, simply divide a company’s total common equity by the number of shares outstanding.
It depends on a number of factors, such 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. This is why it’s so important to do a lot of research before making any investment decisions. In closing, it’s easy to see why the book value per share is such an important metric. It’s a simple way to compare the value minimum requirements for working as an independent contractor of a company’s net assets to the number of shares that are outstanding. 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.
Book Value Per Share vs. Market Stock Price: What is the Difference?
The book value and market value are two measures that can help assess the value of a company by looking at its stocks and future. Using the average number of shares in the formula is essential since the number at the end of the period may factor in a recent buyback or stock issuance, distorting the figure. In other words, the BVPS is essentially how much would remain if the shareholders sold the company’s assets and paid its debts. Notably, in the case of bankruptcy and company liquidation, often assets are liquidated at a discount to book value. If a company holding $100 million of real estate launches a fire sale at liquidation prices, they may only raise $75 million, or less, from such sales. It is critical for investors to understand the concept that there’s no free lunch.
Or, it could use its earnings to reduce liabilities, which would also increase its common equity and BVPS. Generally, the book value per share is used by investors (especially value investors) to determine whether a share is fairly valued. If the BVPS is less than the price of the stock, then that tells an investor that the stock could be overvalued—it costs more than the assets it’s entitled to.
Understanding Book Value Per Share (BVPS)
A company’s stock is considered undervalued when BVPS is higher than a company’s market value or current stock price. If the BVPS increases, the stock is perceived as more valuable, and the price should increase. It’s important to use the average number of outstanding shares in this calculation. A short-term event, such as a stock buy-back, can skew period-ending values, and this would influence results and diminish their reliability.
This differs from the book value for investors because it is only used internally for managerial accounting purposes. To better understand book value per share, it helps to break down each aspect of the ratio. High-interest rates can lead to a rise in debt financing costs, which leads to higher liabilities. In addition, changes in the management hierarchy can influence the BVPS if they impact the company’s direction or efficiency.
Alternatively, another method to increase the BVPS is via share repurchases (i.e. buybacks) from existing shareholders. Therefore, the amount of cash remaining once all outstanding liabilities are paid off is captured by the book value of equity. The following image shows Coca-Cola’s “Equity Attributable to Shareowners” line at the bottom of its Shareowners’ Equity section. It’s one metric that an investor may look for if they’re interested in valuating Coca-Cola as a potential investment. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Remember, even if a company has a high book value per share, there’s no guarantee that it will be a successful investment.
The book value includes all of the equipment and property owned by the company, as well as any cash holdings or inventory on hand. It also accounts for all of the company’s liabilities, such as debt or tax burdens. To get the book value, you must subtract all those liabilities from the company’s total assets.
It measures a company’s book value per share by generating a ratio of equity to outstanding shares. If a company’s BVPS is higher than its market value per share (the current stock price), the stock may be considered undervalued. This situation suggests a potential buying opportunity, as the market may be undervaluing the company’s actual worth. Because book value per share only considers the book value, it fails to incorporate other intangible factors that may increase the market value of a company’s shares, even upon liquidation. For instance, banks or high-tech software companies often have very little tangible assets relative to their intellectual property and human capital (labor force).
If a company’s market cap is three times as high as its book value, it will have a P/B ratio of 3.0x. A company that has assets of $700 million and liabilities of $500 million, would have a book value, or shareholders’ equity, of $200 million. The formula is the same for calculating shareholders’ equity or stockholders’ equity. The book value of equity (BVE) is the value of a company’s assets, as if all its assets were hypothetically liquidated to pay off its liabilities.
For example, if a company has total common equity of $1,000,000 and 1,000,000 shares outstanding, then its book value per share would be $1. The book value per share is calculated by subtracting the preferred stock from the stockholders’ total equity (book value) and dividing that by the average number of outstanding shares. The figure that represents book value is the sum of period cost all of the line item amounts in the shareholders’ equity section on a company’s balance sheet. As noted above, another way to calculate book value is to subtract a business’ total liabilities from its total assets. Book value per share relates to shareholders’ equity divided by the number of common shares.
- Price-to-book (P/B) ratio as a valuation multiple is useful when comparing similar companies within the same industry that follow a uniform accounting method for asset valuation.
- Nevertheless, most companies with expectations to grow and produce profits in the future will have a book value of equity per share lower than their current publicly traded market share price.
- You can use the book value per share formula to help calculate the book value per share of the company.
- In this case, each share of stock would be worth $0.50 if the company got liquidated.
On the other hand, when the BVPS is more than the stock price, that means an investor can essentially buy a share in a company’s assets for less than those assets are actually worth. Investors tend to assign value to companies’ growth and earnings potential, not just their balance sheet assets. As a result, most companies included in indices such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite, possess market values that exceed their book values. The Price/Book ratio is commonly used by value investors to help them screen for potentially undervalued (or overvalued) stocks.
How to Increase the Book Value Per Share
A company’s accounting practices, especially regarding depreciation and amortization, can also significantly affect its book value. Two companies with highly similar assets, but different depreciation and intangible asset value assumptions may have wildly different P/B ratios. For instance, consider a given company that has a market value approximately equal to its book value. The company then hires a famous turnaround manager which excites investors, who bid the shares higher. The market cap of this company increases, although the book value of the company hasn’t changed.
