Book Value Per Share (BVPS)
Book value per share (BVPS) is a figure that evaluates the value of a company's claims based on its net assets.
What Is Book Value Per Share (BVPS)?
Book value per share (BVPS) is a figure that evaluates the value of a company's claims based on its net assets. It measures a company's book value per share by generating a ratio of equity to outstanding shares.
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.
In other words, the BVPS is essentially how much would remain if the shareholders sold the company's assets and paid its debts.
Furthermore, the BVPS reflects the company's stock value:
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If the market value is lower than the book value per share, this may show that the stock price is undervalued.
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If the value exceeds the BVPS, the shares may be overvalued, thus suggesting caution before proceeding.
Suppose a stock is being traded at a lower price than its BVPS. It then highlights that the market values the company at a lower level than its liquidation value.
However, this does not indicate that the stock will become a good investment. So, one must consider other related factors before deciding about the acquisition.
BVPS does not focus on other factors, like the company's growth potential in the future or market conditions, and thus, should not be used alone in analyzing the company's shares' value.
The BVPS is rarely ever used internally and is primarily utilized by investors as they assess the price of a company's stock. This factors into their investment decisions as they consider potential opportunities.
Understanding Book Value Per Share (BVPS)
The book value per share is significant for investors as it helps them determine the intrinsic value of a given company's shares.
In addition to that, it is only sometimes used with others. Instead, it is used with other financial metrics, like the price-to-earnings ratio (P/E ratio) and price-to-book ratio (P/B ratio). These measures help reveal crucial information about the company's financial performance and prices.
Moreover, the BVPS in one industry may not be directly comparable to another. Thus, when comparing, the companies should be within the same industry to avoid confusion or misleading deductions.
Note
The book value per share provides useful information and should be used alongside other measures for a more accurate company valuation. However, there are two main issues that those using the metric should know.
One problem is that the BVPS is not forward-looking. So, it should only sometimes be compared to other measures, like the market value per share. MVPS is forward-looking with the investment community’s perception of the value of the claims, while BVPS is more on the accounting side.
The second problem is that the book value per share undervalues some assets. For example, the value of a brand, created by marketing expenditures over time, might be the company’s main asset and yet does not show up in the calculation of the BVPS.
In another example, in-house R&D may be pretty high but charged as an expense in many cases, thus creating a disparity between book value and market value, which distorts the overall picture.
Formula for Book Value Per Share
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.
As such, the formula looks as follows:
Book Value Per Share = (Stockholders' Equity - Preferred Stock) ÷ Average Shares Outstanding
For example, let us assume we are studying a hypothetical company, Company A. Now, suppose during a specific period, Company A has:
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$16,000,000 in stockholders’ equity
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$4,000,000 in preferred stock
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The average number of 3,000,000 outstanding shares
Calculating the BVPS for this specific period and these numbers would be:
($16,000,000 – $4,000,000) ÷ 3,000,000
= $4.00 book value per share
Note
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.
Book Value Per Share (BVPS) FAQs
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.
The market value depends on the current market price and how many outstanding shares exist. So, it reflects current prices and changes often as it considers sentiment around future growth in the market.
Thus, market value is more subjective as it shows how attractive a company’s share is considered to be in the market and by the investment community. In contrast, book value is more objective, focusing on assets to highlight their financial strength and performance.
Nevertheless, investors should look at both and understand what the figures mean before taking a risk and choosing a stock.
Determining whether a book value per share is “good” or “bad” about investment decisions can be difficult.
The value depends on various elements, such as financial performance, past activity, level of competition, economic environment, management hierarchy, debt and asset base changes, and other market conditions.
Capital expenditures, depreciation, and economic downturns can impact asset values and, thus, the company’s book value per share. For example, economic downturns cause asset values to go down, which leads to a decline in the BVPS.
In addition, introducing new rivals or changes in consumer preferences can also tweak the state of the market and the BVPS.
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.
If the book value exceeds the market value or current price, then its value is currently perceived to be understated. So, an increase in the BVPS could lead to the value of the stock rising, but this does not necessarily equate to a “good” investment.
They are not the same, as they focus on equity/assets and net income, respectively. So, they paint different pictures related to a firm’s financial performance.
Researched and authored by Laila AL-Eisawi | LinkedIn
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