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). Another way to increase BVPS is for a company to repurchase common stock from shareholders. Assume XYZ repurchases 200,000 shares of stock, and 800,000 shares remain outstanding.
Why is BVPS important for value investors?
Book Value Per Share is calculated by dividing the total common equity by the number of outstanding shares. While BVPS considers the residual equity per-share for a company’s stock, net asset value, or NAV, is a per-share value calculated for a mutual fund or an exchange-traded fund, or ETF. For any of these investments, the NAV is calculated by dividing the total value of all the fund’s securities by the total number of outstanding fund shares. Total annual return is considered by a number of analysts to be a better, more accurate gauge of a mutual fund’s performance, but the NAV is still used as a handy interim evaluation tool.
Earnings per share would be the net income that common shareholders would receive per share (company’s net profits divided by outstanding common shares). The book value of a company is based on the amount of money that shareholders would get if liabilities were paid off and assets were liquidated. The market value of a company is based on the current stock market price and how many shares are outstanding.
Uses of BVPS
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. The book 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.
How to Calculate Book Value Per Share (BVPS)
- Book value indicates the difference between the total assets and the total liabilities, and when the formula for book value per share is to divide this book value by the number of common shares.
- 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.
- For example, if a company has a total asset balance of $40mm and liabilities of $25mm, then the book value of equity (BVE) is $15mm.
- As a company’s potential profitability, or its expected growth rate, increases, the corresponding market value per share will also increase.
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. In closing, it’s easy to see why the book value per share is such an important metric. It’s a simple way to compare the value of a company’s net assets to the number of shares that are outstanding.
Let’s say that Company A has $12 million in stockholders’ equity, $2 million of preferred stock, and an average of 2,500,000 shares outstanding. You can use the book value per share formula to help calculate the book value per share of the company. You may ask why we deduct the preferred stock and average outstanding common stock. We deduct preferred stock from the shareholders’ equity because preferred shareholders are paid first after the net credit sales debts are paid off.
The market value per share represents the current price of a company’s shares, and it is the price that investors are willing to pay for common stocks. The market value is forward-looking and considers a company’s earning ability in future periods. As the company’s expected growth and profitability increase, the market value per share is expected to increase further. Book value per share relates to shareholders’ equity divided by the number of common shares.
Or, it could use its earnings to reduce liabilities, which would also increase its common equity and BVPS. A good book how to setup xero two value per share varies by industry, but generally, a higher value indicates a company’s assets exceed liabilities, suggesting a potentially stronger financial position. Comparing it to the stock price helps determine if a stock is trading at a reasonable value. We need to divide the shareholders’ equity available to common stockholders by the number of common shares. 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. BVPS is significant for investors because it offers a snapshot of a company’s net asset value per share.
Book value per share is just one of the methods for comparison in valuing of a company. Enterprise value, or firm value, market value, market capitalization, and other methods may be used in different circumstances or compared to one another for contrast. For example, enterprise value would look at the market value of the company’s equity plus its debt, whereas book value per share only looks at the equity on the balance sheet. Conceptually, book value per share is similar to net worth, meaning it is assets minus debt, and may be looked at as though what would occur if operations were to cease.
By multiplying the diluted share count of 1.4bn by the corresponding share price for the year, we can calculate the market capitalization for each year. The book value of equity (BVE) is the value of a company’s assets, as if all its assets were hypothetically liquidated to pay off its liabilities. If a company has a book value per share that’s higher than its market value per share, it’s an undervalued stock.
To calculate book value per share, simply divide a company’s total common equity by the number of shares outstanding. For example, if a company has total common equity of $1,000,000 and 1,000,000 shares outstanding, then its book value per share would be $1. The first part of our calculation would be to find out the total shareholders’ equity available to common shareholders and preferred stockholders. The book value per share is the value each share would be worth if the company were to be liquidated, all the bills paid, and the assets distributed. It is calculated by the company as shareholders’ equity (book value) divided by the number of shares outstanding.
Nevertheless, most companies with expectations to grow and produce profits in the future will have a book value of equity per share lower than their current publicly traded market share price. 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.
Book value per share (BVPS) tells investors the book value of a firm on a per-share basis. Investors use BVPS to gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. Book value refers to a firm’s net asset value (NAV) or its total assets minus its total liabilities.
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors.