What is book value per share and how can it help you invest?

Anyone who commits to making money on the stock market should know the meaning of the term “book value per share”.

Smart market mavens are always looking for the next Amazon
(AMZN) – Get the Amazon.com, Inc. report or apple
(AAPL) – Get the Apple Inc. (AAPL) report before they appear on the stock market radar and attract too much investor attention. These stocks, in their early days, gave sophisticated investors exactly what they were looking for in a stock with potential – vastly undervalued stocks.

One proven way to identify stocks that are grossly undervalued is to determine their book value per share.

Book value is a key determinant of a healthy but underrated stock. Publicly traded companies always include key financial factors such as earnings, debt, and assets in their public statements. For better transparency, companies break down these factors in more depth so that interested investors can better assess the company’s stocks.

Book value per share is one way for investors to do this, especially value-conscious investors looking for good stock at a discount.

Let’s take a look at book value per share, see how it works, and take a look at the value it brings to investors.

What is book value per share?

Simply put, book value per share defines the book value (i.e. book value) of a share of publicly traded stocks.

Also defined as the next asset value of a business, book value per share is essentially the total assets of a business, but not counting the assets and liabilities of a business.

When the book value per share is high relative to a company’s stock price, the company’s stock is considered undervalued.

In other words, book value per share measures the total equity of a share relative to the number of shares outstanding. Analysts who do this regularly are looking to see if the market value per share is less than the book value per share.

If so, a company’s shares may well be undervalued.

Investors looking to apply book value per share to a stock should examine a company’s balance sheet, which will include the ingredients necessary to determine book value, such as the total value of the asset and the cost of acquiring it. ‘active. On the balance sheet you will also find the accumulated depreciation of company assets, which helps to get the most accurate result when it comes to book value per share.

Calculating the book value per share is not necessarily complicated.

Basically, you subtract a company’s preferred stock from equity and divide that amount by the average amount of shares outstanding.

Here’s the formula for book value per share, from the folks at YCharts.com:

Book value per share = (Equity – Preferred equity) / Total common shares outstanding

For a more real-world example of book value per share in action, let’s turn to AccountingTools.com, which offers this scenario:

XYZ stock has $ 15 million in equity, $ 3 million in preferred stock and an average of 2 million shares outstanding during the measurement period.

The calculation of its book value per share is:

$ 15 million Equity – $ 3 million Preferred shares ÷ 2 million Average number of shares outstanding

= $ 6 Book value per share

Three things to know about book value per share

While it is essential to understand the definition and calculation of book value per share, it is also important to know why the stock valuation model is used and what that means to you as an investor.

Here’s a closer look:

An essential tool for value investors. Book value per share is the most widely used by so-called value investors, championed by Warren Buffet. These investors are always looking for a discount, and book value per share gives them a useful tool to buy a stock at its true value.

For example, when a stock trades below its book value, it is a green light for value investors, who see this scenario as a chance to buy stocks at a price that is actually lower. at the value of the share.

Book value is not the same as market value. While book value per share is a good way to value a stock, it is more of an accounting tool and does not necessarily reflect the true market value of a publicly traded company – companies have different accounting models. to determine the book value, and all models are not the same and depend on the discretion of C-level management.

What book value and market value can do is let an investor know whether the rises or falls are on Wall Street. Basically, if the market value of a business is significantly higher than its book value, this is a bull market scenario. If the opposite is true and book value and market value are more closely bundled, then the market is more likely in a bearish market scenario.

Book value per share is a fairly conservative way of measuring the value of a stock. The book value of a business, stripped down to its essentials, is the value of the business that shareholders will own if the assets of the business are sold and all debts of the business are paid off.

This definition represents a conservative, even conservative, measure of the potential value of a stock.

This is especially the case when compared to other stock valuation models, such as a profit-based calculation where future company growth and profit projections need to be added to the mix. That said, conservative stock valuation models like book value are probably a better indicator of a stock’s potential value, as profit-based models, with all the projections of future growth and earnings necessary to achieve a final verdict, are less stable.

Book value per share is very useful for investors to get a real view of the equity value of a company. Any security that trades below its tangible book value is a godsend for value investors, underscoring the need and importance of book value per share.

If you are looking to get a better idea of ​​the value of a business, based on its internal finances, book value is a good – but not the only – measure.

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