Book Value: Definition, Meaning, Formula, and Examples

The book value per share is calculated using historical costs, but the market value per share is a forward-looking metric that takes into account a company’s earning power in the future. With increases in a company’s estimated profitability, expected growth, and safety of its business, the market value per share grows higher. Significant differences between the book value per share and the market value per share arise due to the ways in which accounting principles classify certain transactions. Book value per share (BVPS) tells investors the book value of a firm on a per-share basis. Investors use BVPS to gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. Book value refers to a firm’s net asset value (NAV) or its total assets minus its total liabilities.

Even if a company has a high book value per share, there’s no guarantee that it will be a successful investment. This is why it’s so important to do a lot of research before making any investment decisions. Preferred stock is usually excluded from the calculation because preferred stockholders have a higher claim on assets in case of liquidation. A P/B ratio of 1.0 indicates that the market price of a share of stock is exactly equal to its book value. For value investors, this may signal a good buy since the market price generally carries some premium over book value. BVPS is typically calculated and published periodically, such as quarterly or annually.

Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Price-to-Book (P/B) Ratio

The book value per share (BVPS) metric helps investors gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. BVPS is what shareholders types of government budget receive if the firm is liquidated, all tangible assets are sold, and all liabilities are paid. Book value per share (BVPS) measures the book value of a firm on a per-share basis. BVPS is found by dividing equity available to common shareholders by the number of outstanding shares. The market value per share is a company’s current stock price, and it reflects a value that market participants are willing to pay for its common share.

However, book value per share can be a useful metric to keep in mind when you’re analyzing potential investments. The ratio may not serve as a valid valuation basis when comparing companies from sales tax definition different sectors and industries because companies in other industries may record their assets differently. BVPS is more relevant for asset-heavy companies, such as manufacturing firms, where physical assets constitute a significant portion of the balance sheet. Yes, if a company’s liabilities exceed its assets, the BVPS can be negative, signaling potential financial distress. By multiplying the diluted share count of 1.4bn by the corresponding share price for the year, we can calculate the market capitalization for each year. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

Similarly, if the company uses $200,000 of the generated revenues to pay up debts and reduce liabilities, it will also increase the equity available to common stockholders. Should the company dissolve, the book value per common share indicates the dollar value remaining for common shareholders after all assets are liquidated and all creditors are paid. Book value per share is just one of the methods for comparison in valuing of a company. Enterprise value, or firm value, market value, market capitalization, and other methods may be used in different circumstances or compared to one another for contrast.

What Does a Price-to-Book (P/B) Ratio of 1.0 Mean?

1. Even if a company has a high book value per share, there’s no guarantee that it will be a successful investment.
2. It is because preferred stockholders are ranked higher than common stockholders during liquidation.
3. But an important point to understand is that these investors view this simply as a sign that the company is potentially undervalued, not that the fundamentals of the company are necessarily strong.
4. Let’s say that Company A has $12 million in stockholders’ equity, $2 million of preferred stock, and an average of 2,500,000 shares outstanding.
5. The book value of equity (BVE) is the value of a company’s assets, as if all its assets were hypothetically liquidated to pay off its liabilities.

A company’s stock is considered undervalued when BVPS is higher than a company’s market value or current stock price. If the BVPS increases, the stock is perceived as more valuable, and the price should increase. In closing, it’s easy to see why the book value per share is such an important metric. It’s a simple way to compare the value of a company’s net assets to the number of shares that are outstanding. But be sure to remember that the book value per share is not the only metric that you should consider when making an investment decision. Price-to-book (P/B) ratio as a valuation multiple is useful when comparing similar companies within the same industry that follow a uniform accounting method for asset valuation.

The BVPS represents the value of equity that remains after paying up all debts and the company’s assets liquidated. Book value per share relates to shareholders’ equity divided by the number of common shares. Earnings per share would be the net income that common shareholders would receive per share (company’s net profits divided by outstanding common shares). It may not include intangible assets such as patents, intellectual property, brand value, and goodwill.

Limitations of BVPS

The book value per share (BVPS) ratio compares the equity held by common stockholders to the total number of outstanding shares. To put it simply, this calculates a company’s per-share total assets less total liabilities. Stock repurchases occur at current stock prices, which can result in a significant reduction in a company’s book value per common share. To get BVPS, you divide the figure for total common shareholders’ equity by the total number of outstanding common shares.

One of the limitations of book value per share as a valuation method is that it is based on the book value, and it excludes other material factors that can affect the price of a company’s share. For example, intangible factors affect the value of a company’s shares and are left out when calculating the BVPS. The book value per share of a company is the total value of the company’s net assets divided by the number of shares that are outstanding. If a company has a book value per share that’s higher than its market value per share, it’s an undervalued stock. Undervalued stock that is trading well below its book value can be an attractive option for some investors. It depends on a number of factors, such as the company’s financial statements, competitive landscape, and management team.

Book Value Per Share vs. Market Stock Price: What is the Difference?

U.S. generally accepted accounting principles (GAAP) require marketing costs to be expensed immediately, reducing the book value per share. However, if advertising efforts enhance the image of a company’s products, the company can charge premium prices and create brand value. Market demand may increase the stock price, which results in a large divergence between the market and book values per share. If a company’s share price falls below its BVPS, a corporate raider could make a risk-free profit by buying the company and liquidating it. If book value is negative, where a company’s liabilities exceed its assets, this is known as a balance sheet insolvency.

Is BVPS relevant for all types of companies?

For example, enterprise value would look at the market value of the company’s equity plus its debt, whereas book value per share only looks at the equity on the balance sheet. Conceptually, book value per share is similar to net worth, meaning it is assets minus debt, and may be looked at as though what would occur if operations were to cease. One must consider that the balance sheet may not reflect with certain accuracy, what would actually occur if a company did sell all of their assets. It approximates the total value shareholders would receive if the company were liquidated.

Value investors use BVPS to identify stocks that are trading below their intrinsic value, indicating potential undervaluation. Conversely, if the market value per share exceeds BVPS, the stock might be perceived as overvalued. BVPS offers a baseline, especially valuable for value investors looking for opportunities in underpriced stocks. In other words, investors understand the company’s recent performance is underwhelming, but the potential for a long-term turnaround and the rock-bottom price can create a compelling margin of safety.

It also may not fully account for workers’ skills, human capital, and future profits and growth. The book value of a company is based on the amount of money that shareholders would get if liabilities were paid off and assets were liquidated. The market value of a company is based on the current stock market price and how many shares are outstanding. To calculate book value per share, simply divide a company’s total common equity by the number of shares outstanding. For example, if a company has total common equity of $1,000,000 and 1,000,000 shares outstanding, then its book value per share would be $1.