What is book value per share (BVPS)?
When you buy stock in a company, you are buying an equity stake. The value of this equity stake will change over time: it will rise and fall with the performance of the business. Much of it comes down to market sentiment: what someone else is willing to pay for that stake if you choose to sell. Investors who want a clear and unbiased valuation of their holding use metrics such as book value per share (BVPS) to fundamentally understand what it’s worth.
Book value per share represents the intrinsic value of a share of a company. If this company closed and was liquidated tomorrow, the BVPS is what each shareholder would receive as payment for their equity stake. This is an important number to know because, used as a benchmark, it can show how much the current stock is undervalued or overvalued by the market.
Here’s a deeper dive into book value per share, how to calculate it, what it means, and how to use it as a valuation measure to understand stock prices.
How to calculate book value per share
To understand book value per share, investors need to look at the company’s balance sheet. Specifically, represented equity (total equity minus preferred equity). Divide this equity by the total number of shares outstanding to get the BVPS price:
BVPS = Total Equity / Total Outstanding Shares
For example, if Company ABC has $750 million in equity on its balance sheet and total shares outstanding of 50 million, its BVPS is $15. This is the amount that each shareholder would receive after the company is liquidated and its debts paid. Note that preferred stockholders’ equity is not included in this calculation because such stockholders receive a prior claim in the event of liquidation.
At a glance: High or low book value per share
Investors using book value as a valuation measure, we look at how much above or below the current market value per share. BVPS is a useful benchmark for determining whether a stock is undervalued or overvalued by the market, and by how much. This is usually accomplished through comparative metrics such as the book-to-market ratio.
- If the book value is lower than the market value, it is an overvalued signal.
- If the book value is higher than the market value, it is an undervalued signal.
- The higher or lower the book price is than the market value, the stronger the signal.
For example, if Company ABC’s BVPS is $15 and its market value is $30, investors might conclude that the market is overvaluing the stock by 100%. Likewise, if BVPS is $15 and the current price is $14, it is very slightly undervalued and could be a good value play.
BVPS vs Current Market Share Price
More often than not, a company’s book value per share will differ significantly from its current price, which is usually more expensive. A market share price above the BVPS indicates that investors are bullish on the company. They are willing to pay a premium above the current value of equity per share because they believe equity will soon increase as the business grows.
It is important to recognize that a higher market share does not necessarily mean that the company is overvalued. Because BVPS only looks balance sheet equity, it does not take into account intangible assets that have an impact on the company’s future sales and income. Comparing BVPS to the current stock price in the market is simply a way to put the stock price into context.
There are occasions when BVPS may be higher than the current stock price. These examples indicate bearish sentiment. Investors feel that the company is going to have a hard time and believe that equity will decline. For example, if a company faces protracted litigation that disrupts business operations, its stock price may be lower than the book value per share. Sometimes it signals a valuable investment.
How can companies increase BVPS?
There are three main ways companies can increase book value per share. Some occur naturally as a result of business growth; others are specific actions a company could use to tighten its financial position.
- Increase assets. The more assets on a company’s balance sheet, the higher the BVPS due to the increase in common stock. This is the most common way for businesses to grow BVPS, as they naturally add assets as the business grows.
- Reduce liabilities. In the same way, adding assets to the balance sheet increases the BVPS, reducing liabilities achieves the same result. It can also happen as a natural function of business growth as businesses pay off old debts.
- Share buybacks. Reducing the total number of shares available drives up the company’s BVPS by strengthening the equity of outstanding shares. This usually happens after positive gains.
All of these strategies to increase BVPS revolve around strong profits. Businesses must have a healthy cash flow to bring in cash that is used to increase assets, reduce liabilities, or buy back stock.
Know the true value of your stock position
Although the price value of a stock changes every minute of every trading period based on investor sentiment and market conditions, it is still important to understand the book value per share. It’s the true value of your participation: the bare minimum of its value.
BVPS will tell you how much premium the company’s stock is trading for and may influence your thesis as to whether it’s a good addition to your portfolio. Remember that this is a static indicator and not forward-looking. Although it represents value, it does not take into account a company’s equity potential.