Book Value Per Common Share BVPS: Definition and Calculation

Stock repurchases occur at current stock prices, which can result in a significant reduction in a company’s book value per common share. To get BVPS, you divide the figure for total common shareholders’ equity by the total number of outstanding common shares. To obtain the figure for total common shareholders’ equity, take the figure for total shareholders’ equity and subtract any preferred stock value.

How to Interpret BVPS?

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. It depends on a number of factors, such as the company’s financial statements, competitive landscape, and management team.

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2. To calculate book value per share, simply divide a company’s total common equity by the number of shares outstanding.
3. For any of these investments, the NAV is calculated by dividing the total value of all the fund’s securities by the total number of outstanding fund shares.
4. There is a difference between outstanding and issued shares, but some companies might refer to outstanding common shares as issued shares in their reports.

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. 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). To calculate book value per share, simply divide a company’s total common equity by the number of shares outstanding.

Often called shareholders equity, the “book value of equity” is an accrual accounting-based metric prepared for bookkeeping purposes and recorded on the balance sheet. A company’s stock is considered undervalued when BVPS is higher than a company’s market value or current stock price. If the BVPS increases, the stock is perceived as more valuable, and the price should increase. It excludes value of intangible assets from book value of shareholders’ equity used in the normal book value per share calculation. A P/B ratio of 1.0 indicates that the market price of a share of stock is exactly equal to its book value.

The Difference Between Market Value per Share and Book Value per Share

Book value per share (BVPS) measures the book value of a firm on a per-share basis. BVPS is found by dividing equity available to common shareholders by the number of outstanding shares. The market value per share is a company’s current stock price, and it reflects a value that market participants are willing to pay for its common share. The book value per share is calculated using historical costs, but the market value per share is a forward-looking metric that takes into account a company’s earning power in the future. With increases in a company’s estimated profitability, expected growth, and safety of its business, the market value per share grows higher. Significant differences between the book value per share and the market value per share arise due to the ways in which accounting principles classify certain transactions.

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. 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.

Market demand may increase the stock price, which results in a large divergence between the market and book values per share. Should the company dissolve, the book value per common share indicates the dollar value remaining for common shareholders after all assets are liquidated and all creditors are paid. Nevertheless, most companies with expectations to grow and produce profits in the future will have a book value of equity per share lower than their current publicly traded market share price. 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).

The Formula for Book Value Per Common Share Is:

As noted above, another way to calculate book value is to subtract a business’ total liabilities from its total assets. Although infrequent, many value investors will see a book value of equity per share below the market share price as a “buy” signal. But an important point to understand is that these investors view this simply as a sign that the company is potentially undervalued, not that the fundamentals of the company are necessarily strong. Book value per share (BVPS) is a measure of value of a company’s common share based on book value of the shareholders’ equity of the company. It is the amount that shareholders would receive if the company dissolves, realizes cash equal to the book value of its assets and pays liabilities at their book value. Now, let’s say that XYZ Company has total equity of $500,000 and 2,000,000 shares outstanding.

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. 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.

The figure of 1.25 indicates that the market has priced shares at a premium to the book value of a share. In other words, investors understand the company’s recent performance is underwhelming, but the potential for a long-term turnaround and the rock-bottom price can create a compelling margin of safety. There are other factors that you need to take into consideration before making an investment. However, book value cpa vs mba salary per share can be a useful metric to keep in mind when you’re analyzing potential investments. Value investors look for relatively low book values (using metrics like P/B ratio or BVPS) but otherwise strong fundamentals in their quest to find undervalued companies. The ratio may not serve as a valid valuation basis when comparing companies from different sectors and industries because companies in other industries may record their assets differently.

While Book Value Per Share can be a helpful indicator of a company’s tangible net assets, it has several limitations that investors should be aware of. For example, if a company has a total asset balance of $40mm and liabilities of $25mm, then the book value of equity (BVE) is $15mm. Therefore, the amount of cash remaining once all outstanding liabilities are paid off is captured by the book value of equity.

If XYZ can generate higher profits and use those profits to buy more assets or reduce liabilities, the firm’s common equity increases. 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. It may not include intangible assets such as patents, intellectual property, brand value, and goodwill. It also may not the shadow fully account for workers’ skills, human capital, and future profits and growth.

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. Investors can calculate it easily if they have the balance sheet of a company of interest. Investors can compare BVPS to a stock’s market price to get an idea of whether that stock is overvalued or undervalued. BVPS represents the accounting value of each share based on the company’s equity, while the market value per share is determined by the stock’s current trading price in the market.