Definition of book value per share (BVPS)

What is book value per share (BVPS)?

Book value per share (BVPS) is the ratio of equity available to common shareholders divided by the number of shares outstanding. This number represents the minimum value of a company’s equity and measures a company’s book value per share.

Key points to remember

  • Book value per share (BVPS) takes the ratio of a company’s common equity divided by its number of shares outstanding.
  • The book value of equity per share effectively indicates a company’s net asset value (total assets – total liabilities) per share.
  • When a stock is undervalued, its book value per share will be higher than its current market price.
  • BVPS is primarily used by stock investors to assess a company’s stock price.

Book value of equity per share (BVPS)

Understanding Book Value Per Share (BVPS)

Book Value Per Share (BVPS) can be used by investors to assess whether a stock’s price is undervalued by comparing it to the market value per share of the company. If a company’s BVPS is higher than its market value per share (the current price of its stock), then the stock is considered undervalued. If the company’s BVPS increases, the stock should be perceived as more valuable and the stock price should rise.

In theory, BVPS is the sum that shareholders would receive in the event of a business liquidation, disposal of all tangible assets, and payment of all liabilities. However, since the assets would be sold at market prices and the book value uses the historical costs of the assets, the market value is considered a better floor price than the book value for a company.

If a company’s stock price falls below its BVPS, a corporate raider could make a risk-free profit by buying the company and liquidating it. If the book value is negative, when a company’s liabilities exceed its assets, it is called balance sheet insolvency.

The formula for BVPS is:



B


V


P


S



=





Total equity




Preferred shares



Total shares outstanding




BVPS = frac { text {Total equity} – text {Preferred Equity}} { text {Total shares outstanding}}



BVPS = Total shares outstandingTotal equity Preferred shares

Equity is the owners’ residual claim in the business after debts have been paid. It is equal to the total assets of a business minus its total liabilities, which is the net asset value or book value of the business as a whole.

Since preferred shareholders have a higher right to assets and profits than common shareholders, preferred shares are subtracted from equity to obtain equity available to common shareholders.

Example of book value per share (BVPS)


Suppose, for example, that the common stock balance of XYZ Manufacturing is $ 10 million and one million common shares 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 more assets or reduce liabilities, the company’s equity increases.

If, for example, the company generates $ 500,000 in profit and uses $ 200,000 of the profit to buy assets, common stock increases with BVPS. If XYZ uses $ 300,000 of its profits to reduce liabilities, ordinary equity also increases.

Another way to increase BVPS is to buy back common stock from shareholders. Many companies use the profits to buy back stocks. Using the XYZ example, suppose the company repurchases 200,000 shares and 800,000 shares remain outstanding. If common equity is $ 10 million, BVPS increases to $ 12.50 per share. Besides share buybacks, a company can also increase BVPS by taking steps to increase asset balance and reduce liabilities.

Market value per share versus book value per share

While BVPS is calculated using historical costs, market value per share is a forward-looking measure that takes into account a company’s future earning capacity. An increase in a company’s potential profitability or expected growth rate should increase the market value per share.

For example, a marketing campaign will reduce BVPS by increasing costs. However, if this builds brand value and the company is able to charge higher prices for its products, its stock price could far exceed its BVPS.

What Does Book Value Per Share (BVPS) Tell You?

In theory, BVPS is the sum that shareholders would receive in the event of a business liquidation, disposal of all tangible assets, and payment of all liabilities. However, its value lies in the fact that investors use it to assess whether a stock’s price is undervalued by comparing it to the company’s market value per share. If a company’s BVPS is higher than its market value per share, which is its current share price, then the stock is considered undervalued.

How can businesses increase BVPS?

A company can use part of its profits to buy assets that would increase common stock with BVPS. Or, it could use its profits to reduce its liabilities, which would also lead to an increase in its common equity and BVPS. Another way to increase BVPS is to buy back common stock from shareholders and many companies use the profits to buy back stock.

How does BVPS differ from market value per share?

While BVPS is calculated using historical costs, market value per share is a forward-looking measure that takes into account a company’s future earning capacity. An increase in a company’s potential profitability or expected growth rate should increase the market value per share. Essentially, the market price per share is the current price of a single share in a publicly traded share. Unlike BVPS, the market price per share is not fixed as it only fluctuates according to the market forces of supply and demand.


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