Book Value Per Share: Formula & Basics for Beginner Investors
Comparing a company's book value per share against other techniques of valuation is standard practice. Depending on the situation or comparison, various valuation techniques, such as enterprise value or firm value, market value, or market capitalization, may be utilized or compared.
In contrast to book value per share, enterprise value considers the market value of a company's stock as well as its debt. Book value per share is conceptually comparable to net worth, i.e., assets less debt, and may be seen as an indication of what would happen if operations were to come to an end.
A company's balance sheet may not accurately represent what would happen if it sold all of its assets, which should be taken into account.
Why do we Use Book Value Per Share?
Some investors may use the book value per share to estimate a company's equity-based on its market value, which is the price of its shares. If a business is presently trading at $20 but has a book value of $10, it is being sold for double its equity.
The denominator is book value per share, and the example is known as the price to book value (P/B). The market price, as opposed to book value, indicates the company's future growth potential. When computing ROE on a per-share basis, book value per share is also utilized in the calculation.
Stockholders' equity (IE) divides net income (IRR). EPS, or earnings per share, measures net income as a percentage of a company's outstanding shares. Stockholders' equity is represented by book value per share, which may be seen at the top of this page.
The formula for Calculating the Book Value Per Share
Calculating a company's value per share using equity accessible to common shareholders is possible using the book value per share formula. It's also known as stockholder's equity, owner's equity, shareholder's equity, or just equity, and it refers to a company's assets minus its liabilities.
When looking at the financial statements of a business, look for information about stockholders' equity, also known as owner's equity. When preferred shares are not present, the entire equity of the stockholders is utilized.
Book Value Per Share = Total Common Stockholder Equity / Number of Common Shares
Example of Book Value Per Share
Consider XYZ Manufacturing, which has a 10 million INR common equity balance and 1 million outstanding shares of common stock. Therefore, the BVPS is (10 million / 1 million shares) = 10. Common equity rises when an organization, such as XYZ, can grow earnings and then reinvest those gains in acquiring new assets or reducing obligations.
If a business earns 500,000 and spends 200,000 of that money on assets, then the value of the common stock rises along with the BVPS as well. If XYZ saves 300,000 in liabilities by using that money, the company's stock price rises.
Repurchasing common stock from existing owners is another method to boost BVPS. Many businesses repurchase shares of their own stock using the money they make. Say, for example, that in the XYZ case the company buys back 200,000 shares of stock and there are still 800,000 outstanding. BVPS rises to 12.50 per share of common stock is worth 10 million. In addition to stock repurchases, a business may raise BVPS by increasing the asset balance and decreasing liabilities.
What is the Significance of Book Value Per Share?
BVPS is theoretically the amount shareholders would get in the case of a liquidation in which all physical assets are sold and all obligations are satisfied. However, investors use it to determine if a stock price is overvalued or undervalued based on the market value per share of the company. Stocks are deemed cheap if their BVPS is greater than their current market value per share (the price at which they are currently trading).
How Can be Book Value Per Share Increased?
A part of a company's profits may be used to purchase assets that raise both common equity and BVPS at the same time. Alternatively, it may utilize the money it takes to pay down debt, increasing both its common equity and its book value per share (BVPS). A second method to boost BVPS is by repurchasing common stock from existing owners, and many businesses utilize their profits to do so.
How is Book Value Per Share Different from Market Value Per Share?
A company's future earnings potential is taken into consideration when calculating the market value per share (MVPS), as opposed to BVPS, which uses past expenses. To put it another way, a rise in the anticipated profits or growth rate of a business should raise the market value per share.
The price of a single publicly traded stock divided by the number of shares outstanding gives us the market price per share. While BVPS is set at a certain price per share, the market price per share varies depending purely on supply and demand in the market.