The P/B ratio, alternatively referred to as the price-equity ratio, is calculated based on the value of a company. Thus, the components of BVPS are tangible assets, intangible assets, and liabilities. When comparing book value per share ratios between companies, investors should consider the industry in which the companies operate.

• For example, the company’s financial statements, competitive landscape, and management team.
• First, we have to calculate the book value of the equity of the company.
• The book value of a company is based on the amount of money that shareholders would get if liabilities were paid off and assets were liquidated.
• The information does not constitute investment or financial advice or advice to buy or sell, or to endorse or solicitation to buy or sell any securities or other financial instrument for any reason whatsoever.
• If book value is negative, where a company’s liabilities exceed its assets, this is known as a balance sheet insolvency.

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Book Value Per Share is calculated by dividing the total common equity by the number of outstanding shares. Since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred stock is subtracted from shareholders’ equity to derive the equity available to common shareholders. The difference between a company’s total assets and total liabilities is its net asset value, or the value remaining for equity shareholders.

A low BVPS might indicate big liabilities, bad asset management, or an undervalued stock by the market. BVPS is crucial for evaluating companies, especially for investors looking for value. If a stock’s market price is below its BVPS, it might mean the stock is a good deal.

• EPS is suited for checking profit-focused firms, especially in growth sectors like technology.
• Hence, the BVSP measures the total assets of a company minus its total liabilities on a per-share basis.
• However, book value per share can be a useful metric to keep in mind when you’re analyzing potential investments.

How to Calculate Book Value per Share – With Examples

The computation of book value per share helps investors gauge whether a stock price is trading less than the company’s market value per share. Stocks with high book value per share than their market value per share which is the current stock price are considered to be undervalued. 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). It depends on a number of factors, such as the company’s financial statements, competitive landscape, and management team.

How to Calculate Book Value Per Share (BVPS)

As a company’s potential profitability, or its expected growth rate, increases, the corresponding market value per share will also increase. 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. Unless the company has updated certain assets and liabilities items on its balance sheet to their (usually higher) fair market values (FMV), the book value of equity (BVE) will not reflect the complete picture. For companies seeking to increase their book value of equity per share (BVPS), profitable reinvestments can lead to more cash. In return, the accumulation of earnings could be used to reduce liabilities, which leads to higher book value of equity (and BVPS).

The Formula:

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. Information on this Website sourced from experts or third party service providers, which may also include reference to any ABCL Affiliate.

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business. 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. BVPS is more relevant for asset-heavy companies, such as manufacturing firms, where physical assets constitute a significant portion of the balance sheet.

Why Does BVPS Matter in Investing?

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Methods to Increase the Book Value Per Share

Book Value Per Share is the total equity available to common shareholders divided by the number of outstanding common shares. In other words, it tells you how much each share would be worth based on the company’s accounting book value. Now, company ABC can generate higher profits and use its profits to buy more assets or reduce liabilities, in order to increase its common equity. So, if company ABC generates earnings worth $500,000 and then uses $200,000 of the profits to buy assets, the common equity of this company and its BVPS can increase as a result of this. More so, if company ABC uses $300,000 of its earnings to reduce liabilities, its BVPS and common equity can also increase. The book value of equity which is often called the shareholders’ equity is the value of a company’s assets as if all of its assets were liquidated to pay off its liabilities.

Book Value Per Share (BVPS) is a crucial financial metric that indicates the per-share value of a company’s equity available to common shareholders. It helps investors determine if a stock is overvalued or undervalued based on the company’s actual worth. Assume that XYZ Manufacturing has a common equity balance of $10 million and 1 million shares of common stock are outstanding. This means that the BVPS is ($10 million / 1 million shares), or $10 per share. If XYZ can generate higher profits and use those profits to buy assets or reduce liabilities, then the firm’s common equity increases.

The book value per share equation makes it easier to compare different companies. A higher BVPS means a company is using its assets well against its debts. A low BVPS means a stock might be undervalued—this signals a potential for profit. But, a high BVPS suggests overvaluation which tells investors to be wary.