What Is Book Value Per Share?
- 21 Aug 2024
- By: BlinkX Research Team
Open Demat Account
Before digging deep into the concept of “Book Value Per Share”, let us first understand the book value meaning. The Book Value Per Share (BVPS) is a financial metric that represents the value of a company’s equity on a per-share basis. It is calculated by dividing the company’s total book value of shares, which is the difference between its total assets and total liabilities, by the number of outstanding shares of common stock.
This figure gives investors an idea of the intrinsic value of each share based on the company’s financial statements, reflecting the net asset value available to shareholders if the company were to liquidate its assets. BVPS is useful for assessing whether a stock is undervalued or overvalued relative to its current market price.
Why do Investors Use Book Value Per Share?
The book value per share is compared to the market price of a firm by certain investors. Suppose a company’s equity shares are transacted at ₹20 each but its book value stands at ₹10; then this share is said to be priced at two times its book value.
This comparison is known as the price-to-book ratio (P/B ratio). While the present worth of a company is known through the book value of share, the market price reflects investor perceptions regarding the future growth trajectory of that company.
Return on equity (ROE) is also computed using book value per share along with earnings per share (EPS). ROE indicates how effectively profit from equity can be generated by an organization while EPS measures the amount of profit earned on every share.
Table of Content
- Why do Investors Use Book Value Per Share?
-
How to Calculate Book Value Per Share? - Significance of Book Value Per Share?
- Difference Between Book Value and Market Value
- Difference Between Book Value and Face Value
- Limitations of Book Value Per Share
- The Bottom Line
How to Calculate Book Value Per Share?
Book value is calculated by adding up all of a company's assets and then subtracting its liabilities. Assets include everything the company owns, like cash and equipment. Liabilities include everything the company owes, like loans and bills.
Hence, the book value of share formula can be represented as below:
Book Value Per Share (BVPS) = Total Shareholders Equity/Number of Outstanding Shares
Let us understand the book value of share formula with a simple example:
1) Total Shareholders' Equity: ₹50,00,000 (This is the total equity of the company, which includes assets minus liabilities)
2) Number of Outstanding Shares: 1,00,000 shares
To calculate the Book Value per share:
Book Value Per Share = ₹50,00,000/₹1,00,000 = ₹50
So, the Book Value per Share in this example is ₹50.
Significance of Book Value Per Share?
Book Value per Share (BVPS) shows how much money shareholders would get if the company sold all its assets and paid off all its debts. Investors use this number to see if a stock is priced too high or too low. If the BVPS is higher than the stock's current price, it might mean the stock is a good deal from an investment perspective.
A P/B ratio below 1 can sugHowever, there is no perfect P/B ratio for deciding if a stock is a good investment. Many fagest that a company's stock is undervalued because its market value is less than its book value. On the other hand, a high P/B ratio might mean the stock is overpriced.ctors can affect a company's P/B ratio, including the company's financial situation, its industry, and the broader market. It is important to consider other key factors before using the P/B ratio to make investment decisions.
How can Book Value Per Share be Increased?
A company can use some of its profits to buy assets, which can increase both its common equity and Book Value per Share (BVPS). It can also use the money to pay off debt, which helps raise both common equity and BVPS. Another way to increase BVPS is by buying back its stock from shareholders, and many companies use their profits for this purpose.
Difference Between Book Value and Market Value
Book Value Per Share is a measure of a company's value based on its financial statements. It is calculated by taking the company's total assets, subtracting its liabilities, and then dividing by the number of outstanding shares. This value reflects the company's net worth according to its accounting records and represents what shareholders would receive if the company were liquidated.
On the other hand, Market Value Per Share is the current price at which a company's stock is trading on the stock market. This value reflects the price investors are willing to pay based on their expectations of the company’s future performance, growth potential, and overall market conditions. Unlike book value, which is based on historical cost and accounting principles, market value fluctuates with supply and demand dynamics in the stock market and investor sentiment.
Difference Between Book Value and Face Value
Book value and face value are distinct financial metrics used to assess different aspects of a company's financial health and securities. Book value refers to the value of a company's equity as reported on its balance sheet, calculated by subtracting total liabilities from total assets and then dividing by the number of outstanding shares. It reflects the net worth of a company based on its historical cost and accounting practices, providing an estimate of the intrinsic value of its shares.
In contrast, face value, also known as par value, is a nominal value assigned to a security, such as a bond or preferred stock, when it is issued. For bonds, face value represents the amount to be repaid to the bondholder at maturity, while for stocks, it is the value assigned per share in the company's charter, often set for legal or accounting purposes and not necessarily reflecting the market price or book value of the shares.
Limitations of Book Value Per Share
Let us go through the 5 limitations of Book Value Per Share:
Historical Cost: BVPS is based on the historical cost of assets, not their current market value. This means it can undervalue assets that have appreciated significantly over time or overstate the value of assets that have depreciated. For example, real estate or equipment purchased years ago might be worth much more or less today than what is reflected in the book value.
Intangible Assets: BVPS often does not account for intangible assets like brand value, patents, or goodwill, which can be significant for many companies, especially in technology or branding-heavy industries. These intangible assets can add substantial value to a company that is not captured in the book value.
Depreciation: The book value is affected by depreciation, which can reduce the value of long-term assets on the balance sheet. This might not accurately reflect the actual economic value of these assets or their future earnings potential.
Debt Impact: High levels of debt can reduce the book value of shares, even if the company is performing well or has substantial growth potential. BVPS might not accurately reflect the company's financial health or its ability to generate future profits.
Non-Recurring Items: BVPS can be influenced by non-recurring items, such as asset write-downs or extraordinary losses, which may not provide a true picture of ongoing operational performance or future potential.
The Bottom Line
Book Value per Share (BVPS) shows how much a company's worth is on a per-share basis. Investors use BVPS to see if a stock is a good deal by comparing it to the stock's current market price. Book value itself is the company’s total assets minus its total debts.
