Book Value Per Common Share BVPS: Definition and Calculation
The difference between a company’s total assets and total liabilities is its net asset value, or the value remaining for equity shareholders. Investors can calculate it easily if they have the balance sheet of a company of interest. Investors can compare BVPS to a stock’s market price to get an idea of whether that stock is overvalued or undervalued.
How Does BVPS Differ from Market Value Per Share?
If relevant, the value of preferred equity claims should also be subtracted from the numerator, the book value of equity. The book value of Google in 2008 was $44.90 per applied overhead vs actual overhead share and had increased by 348% to $201.12 per share by the end of 2016. However, for sectors like technology and pharmaceuticals, where intellectual property and ongoing research and development are crucial, BVPS can be misleading. Investors use BVPS to gauge whether a stock is trading below or above its intrinsic value. With those three assumptions, we can calculate the book value of equity as $1.6bn.
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. One must consider that the balance sheet may not reflect with certain accuracy, what would actually occur if a company did sell all of their assets. Closely related to the P/B ratio is the price-to-tangible-book value ratio (PTVB).
Uses of BVPS
- The figure that represents book value is the sum of all of the line item amounts in the shareholders’ equity section on a company’s balance sheet.
- The market value per share is a company’s current stock price, and it reflects a value that market participants are willing to pay for its common share.
- Next, we need to calculate how much shareholders’ equity is available to the common stockholders.
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We deduct preferred stock from the shareholders’ equity because preferred shareholders are paid first after the debts are paid off. 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.
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). Although infrequent, many value investors will see a book value of equity per share below the market share price as a “buy” signal. But an important point to understand is that these investors view this simply as a sign that the company is potentially undervalued, not that the fundamentals of the company are necessarily strong.
A company can use a financial risk analytics portion of its earnings to buy assets that would increase common equity along with BVPS. Or, it could use its earnings to reduce liabilities, which would also increase its common equity and BVPS. 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. If book value is negative, where a company’s liabilities exceed its assets, this is known as a balance sheet insolvency. The price-to-book (P/B) ratio considers how a stock is priced relative to the book value of its assets. If the P/B is under 1.0, then the market is thought to be underpricing the stock since the accounting value of its assets, if sold, would be greater than the market price of the shares.
What Is the Price-to-Book (P/B) Ratio?
If the market price for a share is higher than the BVPS, then the stock may be seen as overvalued. Intangible assets can be items such as patents, intellectual property, and goodwill. This may be a more useful valuation measure when valuing something like a patent in different ways or if it is difficult to put a value on such an intangible asset in the first place. For example, in most cases, companies must expense research and development costs, reducing book value because this includes the expenses on the balance sheet. However, these R&D outlays can create unique production processes for a company or result in new patents that can bring royalty revenues. The P/B ratio has been favored by value investors for decades and is widely used by market analysts.
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.
The latter is a valuation ratio expressing the price of a security compared to its hard (or tangible) book value as reported in the company’s balance sheet. The tangible book value number is equal to the company’s total book value less than the value of any intangible assets. Book value per share is determined by dividing common shareholders’ equity by total number of outstanding shares.
Another valuable tool is the price-to-sales ratio, which shows the company’s revenue generated from equity investments. 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. 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.
