What is Book Value Per Share

5paisa Research Team Date: 01 Feb, 2023 11:39 AM IST

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Introduction

The book value per share (BVPS) of a publicly-traded firm is the accounting value of each share of its stock. Per share, it reflects the bare minimum in terms of a company's equity worth. Equity available to common shareholders divided by outstanding shares gives you this figure.

It is possible to determine book value per share (BVPS) by dividing the number of outstanding shares by the equity accessible to common shareholders. The book value per share, when contrasted to the stock's current market value, may reveal how a company's stock is valued.

Stocks of a business are considered cheap if their BVPS value surpasses the market value per share (MVPS). Using the book value as a measure of a company's stock's worth, one may guess what the share's future market price could be.

Decoding the Intricacies of Book Value Per Share

A company's book value per share is derived from the equity held by common shareholders, and preferred shares should be removed from this calculation when determining equity value.

It's because preferred shareholders have priority in a company's liquidation over ordinary stockholders. the worth of equity left after all debts have been paid off and the company's assets have been liquidated is shown by the BVPS.

The formula for Calculating BVPS:

Here is the formula for calculating the BVPS of a company:

Book Value Per Share = (Stockholder’s Equity – Preferred Stock) / Average Shares Outstanding

Difference Between Book Value Per Share & Market Value Per Share

One way to assess the worth of a company's stock is to utilize metrics like the book and market value per share. When it comes to stock prices, the market value per share reflects what investors are ready to pay right now for the company's shares.

Forward-looking in nature, the market value takes into account a company's potential to generate profits in the future. The market value per share is anticipated to rise higher as the company's expected growth and profitability improve.

Book value per share, on the other hand, is a metric based on accounting that takes past expenses into account. While the market value per share is a forward-looking measure, it fails to account for changes in the share price over time.

To be cautious, investors use the BVPS to determine the true worth of a business's shares by estimating what shareholders would possess once the firm is liquidated and all debts have been settled.

When future growth and earnings forecasts are uncertain, value investors prefer to use the BVPS as a measure of a stock's potential worth.

Difference Between Book Value Per Common Share & Net Asset Value (NAV)

Net asset value, or NAV, is a per-share value determined for a mutual fund or an exchange-traded fund, or ETF, whereas BVPS analyzes the residual equity per-share of a company's shares.

The NAV for any of these assets is determined by dividing the total value of all the fund's securities by the total number of outstanding fund shares. For mutual funds, the NAV is produced on a daily basis.

Even though many experts think the total yearly return is a better indicator of a mutual fund's success, the NAV is nevertheless useful for making interim assessments.

Shortcomings of Book Value Per Share

For example, book value per share as a valuation approach that removes other important variables from consideration, such as earnings per share, which may have an impact on the share price. As an example, intangible variables influence the value of a company's stock but are not included in the BVPS calculation.

Because of this, the BVPS solely shows what common shareholders will possess once the business is dissolved and its debts are paid off, rather than include any other worth.

Since the value of intangible assets such as copyright and trademarks is not taken into account when calculating the BVPS, tech firms, which have few physical assets but many intangible assets, may be undervalued.

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