Book Value Per Share BVPS: Definition, Formula, How to Calculate, and Example

The book value per share of a company is the total value of the company’s net assets divided by the number of shares that are outstanding. If a company has a book value per share that’s higher than its market value per share, it’s an undervalued stock. Undervalued stock that is trading well below its book value can be an attractive option for some investors. There are a number of other factors that you need to take into account when considering an investment. For example, the company’s financial statements, competitive landscape, and management team. You also need to make sure that you have a clear understanding of the risks involved with any potential investment.

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1. This means that each share of the company would be worth $8 if the company got liquidated.
2. An exception to this valuation is in bank stocks which tend to trade below their BVPS due to their increased risk from trading activities.
3. Capital expenditures, depreciation, and economic downturns can impact asset values and, thus, the company’s book value per share.
4. Book Value Per Share (BVPS) is a fundamental financial metric that represents the equity attributable to each outstanding common share of a company.

When calculating the book value per share of a company, we base the calculation on the common stockholders’ equity, and the preferred stock should be excluded from the value of equity. It is because preferred stockholders are ranked higher than common stockholders during liquidation. The BVPS represents the value of equity that remains after paying up all debts and the company’s assets liquidated. https://www.quick-bookkeeping.net/best-freelance-services-in-2021/ The book value per share (BVPS) is calculated by taking the ratio of equity available to common stockholders against the number of shares outstanding. 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.

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In theory, BVPS is the sum that shareholders would receive in the event that the firm was liquidated, all of the tangible assets were sold and all of the liabilities were paid. However, its value lies in the fact that investors use it to rate of return ror meaning formula and examples gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. If a company’s BVPS is higher than its market value per share, which is its current stock price, then the stock is considered undervalued.

FAQs About Book Value Per Share

Repurchasing 500,000 common stocks from the company’s shareholders increases the BVPS from $5 to $6. Book value per share (BVPS) is a figure that evaluates the value of a company’s claims based on its net assets. It measures a company’s book value per share by generating a ratio of equity to outstanding shares. Because book value per share only considers the book value, it fails to https://www.quick-bookkeeping.net/ 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). For instance, consider a company’s brand value, which is built through a series of marketing campaigns.

How does BVPS help in evaluating whether a stock is undervalued?

Therefore, the amount of cash remaining once all outstanding liabilities are paid off is captured by the book value of equity. Discover the finance term Book Value Per Share (BVPS) and learn its definition, formula, calculation process, and get an example to understand its practical application. Remember, even if a company has a high book value per share, there’s no guarantee that it will be a successful investment. The book value per share is just one metric that you should look at when considering an investment. It’s important to remember that the book value per share is not the only metric that you should consider when making an investment decision.

We endeavor to ensure that the information on this site is current and accurate but you should confirm any information with the product or service provider and read the information they can provide. Determining whether a book value per share is “good” or “bad” about investment decisions can be difficult. Clear differences between the book value and market value of equity can occur, which happens more often than not for the vast majority of companies. As for the next projection period, Year 2, we’ll simply extend each operating assumption from Year 1, and thus, the BVPS will be $1.14 again.

This factors into their investment decisions as they consider potential opportunities. BVPS does not focus on other factors, like the company’s growth potential in the future or market what is depreciation and how do you calculate it conditions, and thus, should not be used alone in analyzing the company’s shares’ value. This means that each share of the company would be worth $8 if the company got liquidated.

High-interest rates can lead to a rise in debt financing costs, which leads to higher liabilities. In addition, changes in the management hierarchy can influence the BVPS if they impact the company’s direction or efficiency. Capital expenditures, depreciation, and economic downturns can impact asset values and, thus, the company’s book value per share. For example, economic downturns cause asset values to go down, which leads to a decline in the BVPS. The book value per share provides useful information and should be used alongside other measures for a more accurate company valuation. The book value per share is significant for investors as it helps them determine the intrinsic value of a given company’s shares.

An exception to this valuation is in bank stocks which tend to trade below their BVPS due to their increased risk from trading activities. For example, let’s say that ABC Corporation has total equity of $1,000,000 and 1,000,000 shares outstanding. To calculate book value per share, simply divide a company’s total common equity by the number of shares outstanding.

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. In return, the accumulation of earnings could be used to reduce liabilities, which leads to higher book value of equity (and BVPS). Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington.

If, for example, the company generates $500,000 in earnings and uses $200,000 of the profits to buy assets, common equity increases along with BVPS. On the other hand, if XYZ uses $300,000 of the earnings to reduce liabilities, common equity also increases. The book value per share (BVPS) ratio compares the equity held by common stockholders to the total number of outstanding shares. To put it simply, this calculates a company’s per-share total assets less total liabilities. Using the XYZ example, assume that the firm repurchases 200,000 shares of stock and that 800,000 shares remain outstanding. Besides stock repurchases, a company can also increase BVPS by taking steps to increase the asset balance and reduce liabilities.

Or, it could use its earnings to reduce liabilities, which would also result in an increase in its common equity and BVPS. Another way to increase BVPS is to repurchase common stock from shareholders and many companies use earnings to buy back shares. Book value per share relates to shareholders’ equity divided by the number of common shares. Earnings per share would be the net income that common shareholders would receive per share (company’s net profits divided by outstanding common shares). However, as the assets would be sold at market prices, and book value uses the historical costs of assets, market value is considered a better floor price than book value for a company. 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.

On the other hand, book value per share is an accounting-based tool that is calculated using historical costs. Unlike the market value per share, the metric is not forward-looking, and it does not reflect the actual market value of a company’s shares. 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). Book value per share is the portion of a company’s equity that’s attributed to each share of common stock if the company gets liquidated.

Alternatively, another method to increase the BVPS is via share repurchases (i.e. buybacks) from existing shareholders. If relevant, the value of preferred equity claims should also be subtracted from the numerator, the book value of equity. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data.