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What is Book Value Per Share?
Book value per share (BVPS) is a metric used to calculate a company’s per-share book value. It uses the common shareholders’ equity balance of a company. Therefore, it is also known as the book value per common share. Calculating a company’s book value per share is relatively easier as the figures are available in the company’s Financial Statements.
What is the formula to calculate the Book Value Per Share?
The formula to calculate the book value per share of a company is as below.
Book Value Per Share (BVPS) = (Shareholders’ Equity – Preferred Stock) / Average Shares Outstanding
Investors may also use the total shares outstanding of a company at the end of its accounting period. However, for companies with variable shares outstanding during a period, the average shares outstanding formula produces a better result. Using the closing number of shares may produce inaccurate or misleading results if there are fluctuations in the number of outstanding stocks during a period.
Example
A company, Red Co., has shareholders’ equity equal to $10 million. Out of this balance, $2 million relates to preferred stocks. Red Co. had 3 million shares outstanding at the start of the period. However, its closing shares outstanding were 5 million. Therefore, Red Co.’s book value per share will be as follows.
Book Value Per Share (BVPS) = (Shareholders’ Equity – Preferred Stock) / Average Shares Outstanding
Book Value Per Share (BVPS) = ($10 million – $2 million) / [(3 million + 5 million) / 2]
Book Value Per Share (BVPS) = $8 million / 4 million
Book Value Per Share (BVPS) = $2/share
How can investors use a company’s Book Value Per Share?
For most investors, the Book Value Per share can be crucial in exploiting profitability opportunities. Investors use a company’s BVPS as a comparative tool with its market value per share (MVPS). Both these valuations come from various sources. What investors look for when comparing both these figures is how they differ from each other.
A company’s BVPS can be higher, lower, or equal to its MVPS. If its BVPS is higher than its MVPS, then it means that the company’s stock is undervalued in the market. Therefore, investors prefer to buy the stock and profit from it when the company’s BVPS and MVPS equalize. A BVPS lower than MVPS can have the opposite effect. In these cases, investors prefer to dispose of their shares at the earliest possible. Lastly, an equal BVPS and MVPS indicate a proper market valuation of a company’s stocks.
What are the limitations of Book Value Per Share?
The book value per share can have some limitations as a valuation method. It uses a company’s book value, which companies can manipulate to get better results. Similarly, it does not consider other material factors that may affect a company’s share prices. For some companies, the book value may not represent the best valuation measure, especially those with high liabilities.
Conclusion
Book value per share is a metric that investors use to calculate a company’s per-share book value. It takes the ratio of a company’s equity available to shareholders against the number of its shares outstanding. Investors can use a company’s BVPS to find under or overvalued stocks to profit from these opportunities.
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