What Is Book Value Per Share BVPS?

The book edsel dope value per share (BVPS) metric helps investors gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. BVPS is what shareholders receive if the firm is liquidated, all tangible assets are sold, and all liabilities are paid. Book value per common share (or, simply book value per share – BVPS) is a method to calculate the per-share book value of a company based on common shareholders’ equity in the company. The book value of a company is the difference between that company’s total assets and total liabilities, and not its share price in the market.

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The book value per share (BVPS) is calculated by taking the ratio of equity available to common stockholders against the number of shares outstanding. When compared to the current market value per share, the book value per share can provide information on how a company’s stock is valued. If the value of BVPS exceeds the market value per share, the company’s stock is deemed undervalued. Assume that XYZ Manufacturing has a common equity balance of $10 million and 1 million shares of common stock are outstanding. If XYZ can generate higher profits and use those profits to buy assets or reduce liabilities, the firm’s common equity increases.

Why Is the Price-to-Book (P/B) Ratio Important?

1. Book value per share is just one of the methods for comparison in valuing of a company.
2. When compared to the current market value per share, the book value per share can provide information on how a company’s stock is valued.
3. Market demand may increase the stock price, which results in a large divergence between the market and book values per share.
4. But an important point to understand is that these investors view this simply as a sign that the company is potentially undervalued, not that the fundamentals of the company are necessarily strong.
5. BVPS relies on the historical costs of assets rather than their current market values.
6. 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 the investors can find out the book value of common stocks, they will be able to figure out whether the market value of the share is worth it. We need to calculate how much shareholders’ equity is available to the common stockholders. Often called shareholders equity, the “book value of equity” is an accrual accounting-based metric prepared for bookkeeping purposes and recorded current portion of long term debt in balance sheet on the balance sheet.

Limitations of BVPS

If the BVPS increases, the stock is perceived as more valuable, and the price should increase. 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. When searching for undervalued stocks, investors should consider multiple valuation measures to complement the P/B ratio. Next, we need to calculate how much shareholders’ equity is available to the common stockholders.

Market demand may increase the stock price, which results in a large divergence between the market and book values per share. A company can also increase the book value per share by using the generated profits to buy more assets or reduce liabilities. For example, if ABC Limited generates $1 million in earnings during the year and uses $300,000 to purchase more assets for the company, it will increase the common equity, and hence, raise the BVPS. The book value per share formula is relevant as it assesses the net value of a company’s assets after liabilities, providing insight into its financial health and true worth on a per-share basis. It aids investors in evaluating whether a stock is undervalued or overvalued based on its intrinsic value.

Yes, if a company’s liabilities exceed its assets, the BVPS can be negative, signaling potential financial distress. BVPS is typically calculated and published periodically, such as quarterly or annually. This infrequency means that BVPS may not always reflect the most up-to-date value of a company’s assets and liabilities. 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.

To get BVPS, you divide the figure for total common shareholders’ equity by the total number of outstanding common shares. To obtain the figure for total common shareholders’ equity, take the figure for total shareholders’ equity and subtract any preferred stock value. If there is no preferred stock, then simply use the figure for total shareholder equity. The market value per share is a company’s current stock price, and it reflects a value that market participants are willing to pay for its common share.

The next assumption states that the weighted average of common shares outstanding is 1.4bn. For companies seeking to increase their book value of equity per share (BVPS), profitable reinvestments can lead to more cash. In return, the accumulation of earnings could be used to reduce liabilities, which leads to higher book value of equity (and BVPS). If we assume the company has preferred equity of $3mm and a weighted average share count of 4mm, the BVPS is $3.00 (calculated as $15mm less $3mm, divided by 4mm shares). Value investors look for relatively low book values (using metrics like P/B ratio or BVPS) but otherwise strong fundamentals in their quest to find undervalued companies. A P/B ratio of 1.0 indicates that the market price of a share of stock is exactly equal to its book value.

However, the market value per share—a forward-looking metric—accounts for a company’s future earning power. As a company’s potential profitability, or its expected growth rate, increases, the corresponding market value per share will also increase. The price-to-book ratio may not be as useful when evaluating the stock of a company with fewer tangible assets on its balance sheets, such as services firms and software development companies.

In other words, investors understand the company’s recent performance is underwhelming, but the potential for a long-term turnaround and the rock-bottom price can create a compelling margin of safety. Therefore, value investors typically look for companies that have low price-to-book ratios, among other metrics. A high P/B ratio can also help investors identify and avoid overvalued companies.