What is the Book Value Per Share (BVPS)?
Book value per share (BVPS) is the ratio of equity available to common shareholders divided by the number of outstanding shares. This figure represents the minimum value of a company’s equity and measures the book value of a firm on a per-share basis.
Book value per share compares the amount of stockholders’ equity to the number of shares outstanding. If the market value per share is lower than the book value per share, then the stock price may be undervalued. Thus, this measure is a possible indicator of the value of a company’s stock; it may be factored into a general investigation of what the market price of a share should be, though other factors concerning cash flows, product sales, and so forth should also be considered. The measurement is rarely used internally; instead, it is used by investors who are evaluating the price of a company’s stock.
If book value per share is calculated with just common stock in the denominator, then it results in a measure of the amount that a common shareholder would receive upon liquidation of the company.
Understanding Book Value Per Share
When calculating the book value per share of a company, we base the calculation on the common stockholders’ equity, and the preferred stock should be excluded from the value of equity. It is because preferred stockholders are ranked higher than common stockholders during liquidation. The BVPS represents the value of equity that remains after paying up all debts and the company’s assets liquidated.
Formula for Book Value Per Share
The formula for calculating the book value per share is given as follows:
The formula for book value per share is to subtract preferred stock from stockholders’ equity, and divide by the average number of shares outstanding. Be sure to use the average number of shares, since the period-end amount may incorporate a recent stock buyback or issuance, which will skew the results. The formula is as follows:
(Stockholders’ Equity – Preferred Stock) ÷ Average shares outstanding = Book value per share
What is the significance of Book Value per Share
BVPS is mostly used by investors to understand if a stock price is undervalued. This is done by comparing the ratio to the company’s market value per share. Here are some of the ways in which it can be interpreted to help with an investment analysis:
If a company’s BVPS is more than its current stock price, then the stock is undervalued.
If the company’s BVPS rises, the stock could be more valuable and this can result in a rise in the stock’s market price
If BVPS is negative, in case a company’s total liabilities are more than its total assets, it can be interpreted as balance sheet insolvency.
While this can be a good starting point for new investors to look for undervalued stocks in the market, these interpretations may not necessarily make the stock a good investment option. This may only indicate whether a stock is undervalued or overvalued and must be seen in combination with other factors like the company’s earnings record.
Problems with Book Value per Share
Anyone using this measure should be aware of two issues, which are noted below.
Book Value is Not Forward-Looking
The market value per share is a forward-looking measure of what the investment community believes a company’s shares are worth; conversely, the book value per share is an accounting measure that is not forward-looking at all. The two measures are based upon different information. Consequently, it is dangerous to compare the two measures.
Book Value Undervalues Some Assets
The book value concept tends to undervalue (sometimes to a considerable extent) a number of assets. For example, the value of a brand, which has been built up through many years of marketing expenditures, may be the primary asset of a company, and yet not appear in the book value figure at all. Similarly, the value of in-house research and development activities could be very high, and yet this expenditure is charged straight to expense in most cases. These factors can yield a massive disparity between book value and market value.
How to Increase Book Value Per Share?
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 results in a higher book value of equity (and BVPS).
Alternatively, another method to increase the BVPS is via share repurchases (i.e. buybacks) from existing shareholders.
Example of Book Value Per Share
As a hypothetical example, assume that XYZ Manufacturing’s common equity balance is $10 million, and that 1 million shares of common stock are outstanding, which means that the BVPS is ($10 million / 1 million shares), or $10 per share. If XYZ can generate higher profits and use those profits to buy more assets or reduce liabilities, the firm’s common equity increases. If, for example, the company generates $500,000 in earnings and uses $200,000 of the profits to buy assets, common equity increases along with BVPS. On the other hand, if XYZ uses $300,000 of the earnings to reduce liabilities, common equity also increases.
Limitations of Book Value Per Share
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). These intangibles would not always be factored in to a book value calculation.