Book value per share

Book value per share
See also


Book value per share is the ratio which represents the number of available common equity divided by the total number of common shares. It shows a book value of each share of stock. In other words, book value is a value of company's net assets, that is: assets minus liabilities.

In case of company liquidation the book value per share is the amount which common equity owners - the shareholders - will receive per share of common stock owned, of course after all the assets would be sold and debtors would be paid. That means that preferred equity is removed from the formula[1].

Formula for calculating book value per share

The formula used to calculate book value per share\[Book value per share = \frac{Book value of common equity}{Total outstanding shares}=\frac{Shareholder equity - Preferred equity}{Total outstanding shares}\]

The book value of common equity can be found in the balance sheet which is released regularly by the company, as well as the total number of outstanding shares.

Shareholder equity consists of common equity and preferred equity. The latter means that owners of preferred stock have priority over common shareholders when it comes to receiving dividends, however, in most cases they do not have voting rights while common shareholders do. Preferred stocks share characteristics of both bonds and common stocks and that is why they are excluded from the formula (as not being “true” stocks).

Example

If a company has shareholder equity of 15.500.000 dollars on a given date and the total outstanding shares number is 1.000.000 on that date, the book value per share of that company is 15.5 dollars (assuming it does not have any preferred stocks).

Application of book value per share

The book value per share can be used by investors to determine what is the relationship between it and market value per share. The market value per share is current price of stock and it represents how much the market participants perceive common share of the stock is worth. By doing so, they can determine and decide whether company stock is undervalued or overvalued. If a book value per share of a company is higher than market value per share (being the current price of the stock on the market) then the stock is undervalued. In that situation it is an attractive stock to buy [2]. The decrease in book value per share means that the stock's market value should go down too, and if it increases, the stock price should increase too.

The main drawback of book value per share is that it is based on historical data from the last balance sheet release period. Whereas, the market value per share is based on current situation and market's perception of the company's stock price and value. Also, the market value per share is market's collective forecast of the stock future performance - it is based on the perceived probable future growth of the company. For example, an expected profitability or some information providing news about potential increase in profits of the company may drive the price of share of the stock. Also, because the book value per share is calculated based on balance sheet reported by the company, the fixed (noncurrent) assets are being reported at their original cost with their accumulated depreciation and amortization taken into account. As a result of that, a difference between book value per share and market value per share might occur.

The book value per share is one of the most popular methods for measuring the value of a company. Some of other metrics include market value or market cap (capitalization). In concept, book value per share is similar to net worth of company, because it shows the relationship between assets and liabilities [3]. It is an information which shows what would happen if a company would sell all of its assets in that moment. However, book value per share based on data from company's balance sheet may not be as accurate as it seems, because some of the assets values are only estimations and accuracy of the approximations may vary.

References

Footnotes

  1. Ahmadi, A. (2017)
  2. Bini, Ma. & Penman, S. (2013)
  3. Warrad, L., H. (2017)

Author: Klaudia Trybuła