Book Value per Share: Meaning, Formula & Basics

With the help of this tool, investors can gain access to a company’s net asset value per share, i.e. how much each share is worth if the company decides to pay off all its debts and sell all of its assets. It paints a more detailed picture of the standing of a company in the market. Book value per share is a number that can be actively increased through planning company assets better or through other methods depending on C-suite decisions and strategies. By representing the net asset value per share, it allows investors to assess the portion of assets allocated to each outstanding share.

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. Assume that XYZ Manufacturing has a common equity balance of $10 million and 1 million shares of common stock are outstanding. This means that the BVPS is ($10 million / 1 million shares), or $10 per share.

Companies Suited to Book Value Plays

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. This formula shows the net asset value available to common shareholders, excluding any preferred equity. The second part divides the shareholders’ equity available to equity stockholders by the number of common shares.

Manufacturing companies offer a good example of how depreciation can affect book value. These companies have to pay huge amounts of money for their equipment, but the resale value for equipment usually goes down faster than a company is required to depreciate it under accounting rules. The answer could be that the market is unfairly battering the company, but it’s equally probable that the stated book value does not represent the real value of the assets. Companies account for their assets in different ways in different industries, and sometimes even within the same industry. This muddles book value, creating as many value traps as value opportunities. A price-to-book ratio under 1.0 typically indicates an undervalued stock, although some value investors may set different thresholds such as less than 3.0.

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There are other factors that you need to take into consideration before making an investment. However, book value per share can be a useful metric to keep in mind when you’re analyzing potential investments. BVPS is more relevant for asset-heavy companies, such as manufacturing firms, where physical assets constitute a significant portion of the balance sheet. Value investors use BVPS to as a dependent 2021 identify stocks that are trading below their intrinsic value, indicating potential undervaluation. Conversely, if the market value per share exceeds BVPS, the stock might be perceived as overvalued.

In other words, it is calculated by taking the original cost of the asset and subtracting the accumulated depreciation or amortization up to the current date. Consequently, it can be conceptualized as the net asset value(NAV) of a company, obtained by subtracting its intangible assets and liabilities from the total assets. For instance, if a vehicle costs ₹1,00,000 and its accumulated depreciation amount is Rs. 50,000, then, the book value in the market price, and book value of the stock market of this vehicle will be Rs. 50,000. The book value per share (BVPS) ratio compares the equity held by common stockholders to the total number of outstanding shares. To put it simply, this calculates a company’s per-share total assets less total liabilities. Book value per share compares the amount of stockholders’ equity to the number of shares outstanding.

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We need to divide the shareholders’ equity available to common stockholders by the number of common shares. 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. One of these involves using a part of the company’s profits to purchase assets to increase the value of the common equity and BVPS together. As an alternative way, the company can also use the profits to pay off its debt which will end up increasing the value of both its common equity and the BVPS. Book value per share is determined by dividing common shareholders’ equity by total number of outstanding shares.

• 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.
• The higher the liabilities, the lower the common equity, and thus, the lower the book value per share.
• This is especially applicable when the analyst has low visibility of the company’s future earnings prospects.
• With that said, if the marketing efforts boost the company’s sales and it makes unprecedented profits thereafter, the consequent market value per share would increase.

Grey Market Premium (GMP):

Investors can use this ratio to assess whether the stock is trading at a premium (P/B ratio above 1) or a discount (P/B ratio below 1) relative to its BVPS. As previously stated, it represents the contrast between a company’s total assets and liabilities, as recorded on its balance sheet. Assets encompass both current and fixed assets, while liabilities comprise both current liabilities and non-current liabilities.

Keep in mind that book value and BVPS do not consider the future prospects of the firm – they are only snapshots of the common equity claim at any given point in time. A going concern is whether a company should always trade at a price/BVPS ratio in excess of 1 times if the market properly reflects the future prospects of the corporation and the upside potential of the stock. While corporate debt holders and preferred shareholders are entitled to a fixed series of cash payments, the cash flow in excess of those amounts is essentially the property of the common shareholders.

BVPS is the book value of the company divided by the corporation’s issued and outstanding common shares. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. The examples and/or scurities quoted (if any) are for illustration only and are not recommendatory. In conclusion, book value is a fundamental metric that provides valuable insights into a company’s net asset value per share. This means that the market price of the company’s shares is 1.5 times higher than its book value per share.

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• You may ask why we deduct the preferred stock and average outstanding common stock.
• The book value of a share, also known as the “book price,” is the value of a company’s equity divided by the number of outstanding shares.
• This helps you better create a picture of the investment and how lucrative it will be for you in the long run.
• HDB Financial Services, a leading NBFC backed by HDFC Bank, is set to launch its much-anticipated IPO.

Book value per share also tells you about whether or not the stock you are purchasing is undervalued. This may happen due to countless reasons, such as market dips or crashes, investors losing confidence in a company, deterioration in a company’s financial health or simply because of the media being harsh on a company. This takes away from the common equity, reducing the value of book value per share. With that said, if the marketing efforts boost the company’s sales and it makes unprecedented profits thereafter, the consequent market value per share would increase. Market value per share is a metric that captures the future status of a company’s stock, while the book value per share is calculated on historical data.

Or it could use its earnings to reduce liabilities, which would also increase its common equity and BVPS. Investors use BVPS to gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. Another way to increase BVPS is for a company to repurchase common stock from shareholders. If a company’s share price falls below its BVPS, a corporate raider could make a risk-free profit by buying the company and liquidating it.

Example of BVPS

The book value per share of a company can be calculated by taking its total equity and dividing it by its outstanding shares. This will help investors analyze whether the company’s stock is undervalued or overvalued when compared to its current market price. BVPS is particularly helpful in gauging the asset value of companies working in sectors with a lot of physical assets. The book value meaning in share market, more commonly known as net book value or carrying value, is a financial metric that represents the value of an asset on a company’s balance sheet.

If the market value per share is lower than the book value per share, then the stock price may be undervalued. The measurement is rarely used internally; instead, it is used by investors who are evaluating the price of a company’s stock. Equity investors often compare BVPS to the market price of the stock in the form of the market price/BVPS ratio to attribute a measure of relative value to the shares.

Book value per share (BVPS) measures a company’s total assets minus its liabilities and then divides the total by the number of shares outstanding. When investors want to find out a company’s value per share with the equity that common shareholders have access to, it can only be done using the book value per share formula. It’s also known as stockholder’s equity, owner’s equity, shareholder’s equity, or just equity. Book value per share (BVPS) is a measure of value of a company’s common share based on book value of the shareholders’ equity of the company. It is the amount that shareholders would receive if the company dissolves, realizes cash equal to the book value of its assets and pays liabilities at their book value.