Book Value Per Share: Definition, Calculation, Importance & Limitations (2024)

Book Value Per Share (BVPS) is a crucial financial metric that indicates the per-share value of a company’s equity available to common shareholders. It helps investors determine if a stock is overvalued or undervalued based on the company’s actual worth.

How to Calculate BVPS?

Book Value Per Share: Definition, Calculation, Importance & Limitations (1)

Book Value Per Share is calculated by dividing the total common equity by the number of outstanding shares.

The formula for calculating BVPS is straightforward:

BVPS = (Total Shareholders’ Equity − Preferred Equity) / Total Outstanding Shares

This formula shows the net asset value available to common shareholders, excluding any preferred equity.

Why is BVPS Important?

BVPS is significant for investors because it offers a snapshot of a company’s net asset value per share. It is essential for making informed investment decisions. By analyzing BVPS, investors can gain insights into a company’s financial health and intrinsic value, aiding in the assessment of whether a stock is over or undervalued.

Investors use BVPS to gauge whether a stock is trading below or above its intrinsic value.

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.

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.

Factors Influencing BVPS

Several factors can influence a company’s operating margin. Some key ones include:

Asset Appreciation/Depreciation: Changes in the value of a company’s assets impact its equity and, consequently, its BVPS.

Liabilities: An increase in liabilities without a corresponding increase in assets reduces shareholders’ equity and BVPS.

Share Issuance or Buybacks: Issuing more shares dilutes BVPS, while share buybacks increase BVPS by reducing the number of outstanding shares.

Retained Earnings: Profits retained in the company increase total equity, thus raising BVPS.

Limitations of BVPS

While Book Value Per Share can be a helpful indicator of a company’s tangible net assets, it has several limitations that investors should be aware of.

Exclusion of Intangible Assets

One of the primary limitations of BVPS is its exclusion of intangible assets. BVPS is calculated by considering the book value of tangible assets only, which are total assets minus intangible assets like copyrights, trademarks, and patents. This exclusion can significantly undervalue companies, especially in technology and pharmaceutical sectors, where intangible assets represent a substantial portion of the company’s value.

Reliance on Historical Costs

BVPS relies on the historical costs of assets rather than their current market values. This approach can lead to significant discrepancies between the book value and the actual market value of a company’s assets. Over time, the historical cost basis may not reflect the true worth of assets due to inflation, depreciation, and changes in market conditions, leading to potential misvaluation of the company’s stock.

Periodic Calculation and Publication

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.

Sector-Specific Limitations

The relevance of BVPS can vary greatly across different sectors. For asset-heavy industries, BVPS might provide a reasonable estimate of value. However, for sectors like technology and pharmaceuticals, where intellectual property and ongoing research and development are crucial, BVPS can be misleading.

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BVPS represents the accounting value of each share based on the company’s equity, while the market value per share is determined by the stock’s current trading price in the market.

Why is BVPS important for value investors?

Value investors use BVPS to identify stocks that are trading below their intrinsic value, indicating potential undervaluation.

Can BVPS be negative?

Yes, if a company’s liabilities exceed its assets, the BVPS can be negative, signaling potential financial distress.

How often is BVPS calculated?

BVPS is typically calculated quarterly or annually, coinciding with the company’s financial reporting periods.

Is BVPS relevant for all types of companies?

BVPS is more relevant for asset-heavy companies, such as manufacturing firms, where physical assets constitute a significant portion of the balance sheet.

Book Value Per Share: Definition, Calculation, Importance & Limitations (2024)

FAQs

Book Value Per Share: Definition, Calculation, Importance & Limitations? ›

Book value per share (BVPS) takes the ratio of a firm's common equity divided by its number of shares outstanding. Book value of equity per share effectively indicates a firm's net asset value (total assets - total liabilities) on a per-share basis.

What are the limitations of book value per share? ›

One of the limitations of book value per share as a valuation method is that it is based on the book value, and it excludes other material factors that can affect the price of a company's share. For example, intangible factors affect the value of a company's shares and are left out when calculating the BVPS.

What is the importance of book value per share? ›

The book value gives you a fair idea of what the company is worth in financial terms. It shows the amount that you stand to get in case of a company's liquidation. If the book value of a company is higher than its market value, it means that its stock price is undervalued. This is a basic tenet of value investing.

How is book value per share calculated? ›

Book value per share (BVPS) is calculated as the equity accessible to common shareholders divided by the total number of outstanding shares.

What is considered a good book value per share? ›

What is a good book value per share? A good book value per share is one that is above the current stock price. This means that the company is trading below its assets and would be a good investment opportunity.

What is the book value per share for dummies? ›

Book value per share (BVPS) takes the ratio of a firm's common equity divided by its number of shares outstanding. Book value of equity per share effectively indicates a firm's net asset value (total assets - total liabilities) on a per-share basis.

Is it good to buy stock less than book value? ›

Investment decision-making: Book value can be used to evaluate the potential profitability of an investment. If the market value of a company's shares is lower than its book value per share, it may indicate that the stock is undervalued and presents a good investment opportunity.

What is book value in simple words? ›

Book value is the net value of a firm's assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company.

Is higher book value better? ›

Yes, book value can be a good indicator of a company's value. If the book value per share is higher than its market value per share then it can indicate an undervalued stock. If the book value per share is lower than its market value per share, it can indicate an overpriced, or overvalued stock.

What is a good PB ratio? ›

Conventionally, a PB ratio of below 1.0, is considered indicative of an undervalued stock. Some value investors and financial analysts also consider any value under 3.0 as a good PB ratio. However, the standard for “good PB value” varies across industries.

What if book value per share is negative? ›

The stock price will also rise in the market if a company's share price goes below its book value per share, giving rise to an opportunity for making risk-free profits. But if the stock holds negative book value, then it represents a company's liabilities are more than its assets, resulting in balance sheet insolvency.

What is a good market to book ratio? ›

What should the book to market factor be? Generally, the results of your book to market ratio should be around 1. Less than 1 implies that a company can be bought for less than the value of its assets. A higher figure of around 3 would suggest that investing in a company will be expensive.

What is a good PE ratio? ›

Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.

What is the best book value for a stock? ›

Traditionally, a P/B less than 1.0 is considered a good value, but it can be difficult to pinpoint a "good" P/B ratio since it can vary by industry and any particular company may have underlying financial troubles.

Why would a company trade below book value? ›

Firms that are expected to consistently earn less on their investments (return on equity) than you would require them to earn given their risk (cost of equity) should trade at less than book value.

What is the formula for book value? ›

Book value of an asset = total cost - accumulated depreciation. Book value of a company = assets - total liabilities. Book value per share (BVPS) = (shareholders' equity - preferred stock) / average shares outstanding.

Can book value be greater than share price? ›

If the book value per share is higher than its market value per share then it can indicate an undervalued stock. If the book value per share is lower than its market value per share, it can indicate an overpriced, or overvalued stock.

Why is the book value per share normally less than the stock price? ›

It is quite common to see the book value and market value differ significantly. The difference is due to several factors, including the company's operating model, its sector of the market, and the company's specific attributes. The nature of a company's assets and liabilities also factor into valuations.

What causes book value per share to decrease? ›

A company's stock buybacks decrease the book value and total common share count. Stock repurchases occur at current stock prices, which can result in a significant reduction in a company's book value per common share.

Is book value per share a GAAP measure? ›

Non-GAAP financial measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. The most comparable U.S. GAAP financial measure is book value per common share.

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