Book Value Per Common Share BVPS: Definition and Calculation

It helps investors determine if a stock is overvalued or undervalued based on the company’s actual worth. 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. As noted above, another way to calculate book value is to subtract a business’ total liabilities from its total assets. The book value per share and the market value per share are some of the tools used to evaluate the value of a company’s stocks. The market value per share represents the current price of a company’s shares, and it is the price that investors are willing to pay for common stocks.

At the same time, we use book value in the case of the ROE formula when we calculate the ROE per share. However, for sectors like technology and pharmaceuticals, where intellectual property and ongoing research and development are crucial, BVPS can be misleading. The term “book value” is derived from accounting lingo, where the accounting journal and ledger are known as a company’s books. Let us take an example of how we can incorporate Trailing and Forward Price to Book Value ratios to identify the cheapest and most expensive stock from the consideration set. Like the Trailing PE and the Forward PE, we can have a similar formula for Price to Book Value ratio. Automobile companies generally have a Price to Book value ratio greater than 1.0x.

What is Price to Book Value?

This approach can lead to significant discrepancies between the book value and the actual market value of a company’s assets. 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 what is the journal entry to record amortization expense comparing it to the firm’s market value per share.

The first thing one might do is compare the price/BVPS number to the historic trend. In this case, the company’s price/BVPS multiple seems to have been sliding for several years. In this case, the stock seems to trade at a multiple that is roughly in line with its peers. If the company is going through a period of cyclical losses, it may not have positive trailing earnings or operating cash flows. Therefore, an alternative to the P/E approach may be used to assess the current value of the stock. This is especially applicable when the analyst has low visibility of the company’s future earnings prospects.

How to Calculate BVPS?

1. This is why it’s so important to do a lot of research before making any investment decisions.
2. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
3. The book value per share (BVPS) metric helps investors gauge whether a stock price is undervalued by comparing it to the firm’s market value per share.
4. Moreover, this also helps with companies close to bankrupcy or liquidation as investors are compensated based on the book value and not the market values in scenarios of this nature.
5. BVPS is found by dividing equity available to common shareholders by the number of outstanding shares.

Even though book value per share isn’t perfect, it’s still a useful metric to keep in mind when you’re analyzing potential investments. Conversely, if the market value per share exceeds BVPS, the stock might be perceived as overvalued. BVPS offers a baseline, especially valuable for value investors looking for opportunities in underpriced stocks.

How to Interpret BVPS?

Assume XYZ repurchases 200,000 shares of stock, and 800,000 shares remain outstanding. In simplified terms, it’s also the original value of the common stock issued plus retained earnings, minus dividends and stock buybacks. BVPS is the book value of the company divided by the corporation’s issued and outstanding common shares. 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. You can use the book value per share formula to help calculate the book value per share of the company. For example, let’s say that ABC Corporation has total equity of $1,000,000 and 1,000,000 shares outstanding.

The price to book value ratio is one of the relative valuation tools used to measure stock valuation. Now, let’s say that Company B has $8 million in stockholders’ equity and 1,000,000 outstanding shares. Using the same share basis formula, we can calculate the book value per share of Company B.

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. It depends on a number of factors, such as the company’s financial statements, competitive landscape, and management team. Even if a company has a high book value per share, there’s no guarantee that it will be a wave accounting reviews successful investment. This is why it’s so important to do a lot of research before making any investment decisions.

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We have noted that P/B ratios cannot be applied to Internet and software companies from the above. However, we can still use these ratios for capital-intensive proxy companies like automobiles and Oil & Gas. So let us now look at if the price to book value makes sense for Financial Sectors.