Book value per share (BVPS) is the minimum cash value of a company and its equity. It expresses the minimum value that would be available to common shareholders after debts are paid. If the company was liquidated, how much could they claim after liabilities?
There are two main types of shareholders: common and preferred. When an investor buys a portion of a public company, they will receive preferred stocks. While they will not have voting rights as shareholders, these shares have a fixed dividend rate. Preferred stocks are also usually paid out before common stocks. The remaining stocks are common shares held by shareholders who do have voting rights.
In essence, the book value per share seeks to find out how much are people with common stocks entitled to from the company’s equity based on the number of shares they own. The BVPS is often used when the total amount of preferred stock outstanding is not available. So instead, you can look at the book value of the company. The “book value” is also known as its net asset value, which is the assets after liabilities. This total is then parsed out among each share for common shareholders.
Book Value Per Share Formula
The formula requires you to know the company’s total equity. While this is usually found on a balance sheet, it is helpful to know how to retrieve this value yourself. The equity is the total number of assets after liabilities are subtracted.
You should be including all types of assets available. This could be cash, accounts receivable, investments, property, equipment, or inventory. Liabilities would total up any debt (long term or short term), taxes, fees, and anything owed to creditors or suppliers. Using these two totals, you can determine the company’s equity.
You also need to know the total amount of preferred equity. This can also be found on a balance sheet but is usually spread out over a couple of different sections. The preferred equity is any liabilities with a higher priority, ie. preferred shares. As stated above, the preferred stock is owned by investors who have given capital to the company. They are paid dividends first, before common stock owners.
The “outstanding shares” would be the total of the shares that are owned by shareholders. This number can change as the market changes. However, because we have already removed the preferred equity, this formula tells us the book value of the equity per common share.
Book Value Per Share Example
Ashley has invested in a soda company that is rising in popularity throughout the midwest. As a common shareholder, she wants to know the minimum equity that she would have a claim on. Ashley looks at their stock chart and finds their equity is $9.6 million. Their preferred equity is $3.09 million. She can also see that they have $61.5 million shares outstanding. What would the book value per share be?
Let’s break it down to identify the meaning and value of the different variables in this problem.
- Equity: $9,600,000
- Preferred Equity: $3,090,000
- Outstanding Shares: $61,500,000
We can apply the values to our variables and calculate the book value per share:
In this case, the book value per share for this soda company would be $0.11.
With an understanding of what the BVPS means, Ashley can compare this result with how the company is trading on the market. If they are trading below book value, she should watch out. But if they are trading above the book value per share, they would be considered undervalued and would be hotter on the market.
Book Value Per Share Analysis
The book value per share is a finance tool used to assess the current stock price of a company. Ideally, investors are searching for stocks that have not peaked in their value. They want to be able to jump in early to then see the company grow.
If a company was interested in increasing its BVPS amount, they have a couple of options. First, they could work on growing their assets. Can they improve their income to increase cash flow? Next, they can look at reducing their liabilities by selling unnecessary assets or using cash flow to pay down debts. Finally, they can consider a method known as buying back shares. To do this, the company would use some of its earnings to purchase back shares of common stock from the market. Many companies keep a controlling number of shares for themselves already.
As with many other calculations and financial principles, the BVPS should not be the only metric you examine. Just the BVPS will not always give you an accurate indication of a company’s health. You could look at earnings or dividends per share, etc. Additionally, some industries can have a cyclical pattern to them, meaning that sometimes they are doing well while other times they may seem to fall behind. When you’re checking out a specific company, you should be taking the health of the entire industry into account.
Conclusion
- The book value per share is the minimum cash value of a company and its equity for common shareholders.
- The formula for book value per share requires three variables: total equity, preferred equity, and total outstanding shares.
- To find the equity, you should subtract the company’s liabilities from its assets.
- Preferred equity is money owed to preferred shareholders that have an invested stake in the company and are paid dividends first at a fixed rate.
Book Value Per Share Calculator
You can use the book value per share calculator below to quickly estimate the minimum value of a company for common shareholders by entering the required numbers.
FAQs
1. What is book value per share?
The book value per share is the minimum cash value of a company and its equity for common shareholders. To find the equity, you should subtract the company’s liabilities from its assets. Preferred equity is money owed to preferred shareholders that have an invested stake in the company and are paid dividends first at a fixed rate.2. How do you calculate the book value per share?
To calculate book value per share, you need the following variables: total equity, preferred equity, and total outstanding shares. First, find the equity by subtracting liabilities from assets. Next, find the preferred equity by dividing total liabilities by total shares outstanding. Finally, divide the equity by the preferred equity to find the book value per share.
3. What is a good book value per share?
A good book value per share is one that is above the current stock price. This means that the company is trading below its assets and would be a good investment opportunity.
4. Is a high book value good?
A high book value is not always good. It can indicate that the company is doing well, but it can also be a sign that the stock price has already peaked. You should examine other factors, such as earnings or dividends per share when considering whether to invest in a company.
5. Why is book value less than market value?
Book value is less than market value because the market value includes the current stock price, which is more than the book value. The market value is what someone would pay for all of the company's assets, liabilities, and equity.
