Book Value Per Common Share BVPS: Definition and Calculation

Alongside her accounting practice, Sandra is a Money and Life Coach for women in business. There are other factors that you need to take into consideration before making an investment. However, book value per share can be a useful metric to keep in mind when you’re analyzing potential investments. One limitation of book value per share is that, in and of itself, it doesn’t tell you much as an investor. Investors must compare the BVPS to the market price of the stock to begin to analyze how it impacts them.

Strategies to elevate BVPS

The market value per share represents the current price of a company’s shares, and it is the price that investors are willing to pay for common stocks. The market value is forward-looking and considers a company’s earning ability in future periods. As the company’s expected growth and profitability increase, the market value per share is expected to increase further.

Calculating Book Value of Equity Per Share (BVPS)

To compute the return on equity formula, investors can use the book value per share, abbreviated as ROE. That said, BVPS is a useful financial metric that helps investors to gauge whether a stock may be overvalued or undervalued. Such information is always of great value when complemented with other financial metrics as it goes a long way in helping one make informed investing decisions. Investors are fond of companies that pay close attention to strategies that have the potential to increase BVPS, as it shows seriousness towards growth and shareholder value. Companies generating higher profits are usually in the best position to increase BVPS.

Methods to Increase the Book Value Per Share

  1. If we assume the company has preferred equity of $3mm and a weighted average share count of 4mm, the BVPS is $3.00 (calculated as $15mm less $3mm, divided by 4mm shares).
  2. They may generate sales with that software, but there isn’t a warehouse full of software code that investors can look at to gauge future sales.
  3. So, an increase in the BVPS could lead to the value of the stock rising, but this does not necessarily equate to a “good” investment.
  4. In return, the accumulation of earnings could be used to reduce liabilities, which leads to higher book value of equity (and BVPS).

If XYZ can generate higher profits and use those profits to buy more assets or reduce liabilities, the firm’s common equity increases. If, for example, the company generates $500,000 in earnings and direct vs indirect cash flow methods uses $200,000 of the profits to buy assets, common equity increases along with BVPS. On the other hand, if XYZ uses $300,000 of the earnings to reduce liabilities, common equity also increases.

The Difference Between Book Value per Share and Net Asset Value (NAV)

Comparing BVPS to the market price of a stock is known as the market-to-book ratio, or the price-to-book ratio. An asset’s book value is calculated by subtracting depreciation from the purchase value of an asset. Depreciation is generally an estimate, and there are various methods for calculating depreciation. They are not the same, as they focus on equity/assets and net income, respectively. If the book value exceeds the market value or current price, then its value is currently perceived to be understated. So, an increase in the BVPS could lead to the value of the stock rising, but this does not necessarily equate to a “good” investment.

How to Increase the Book Value Per Share

It is impossible to pinpoint a specific value and declare it as a good book value per share that investors should watch for since companies come in all sizes and issue different amounts of shares. That said, by comparing the stock’s current market price to its book value per share, investors can get an idea of the stock’s value and the company’s potential growth prospects. 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). 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. You can use the book value per share formula to help calculate the book value per share of the company.

Market Value Per Share vs. Book Value Per Share

Assets are items of monetary value used over time to produce a benefit for the asset’s holder. If a company owns assets, it includes them in the balance sheet to maintain accurate https://www.simple-accounting.org/ accounting records. However, if the investors are mistaken, then it might mean that a stock is overvalued, presenting an opportunity for value investors to take advantage of.

Using the XYZ example, assume that the firm repurchases 200,000 shares of stock and that 800,000 shares remain outstanding. Besides stock repurchases, a company can also increase BVPS by taking steps to increase the asset balance and reduce liabilities. The book value per share (BVPS) is calculated by taking the ratio of equity available to common stockholders against the number of shares outstanding. When compared to the current market value per share, the book value per share can provide information on how a company’s stock is valued.

This tells you something about book value as well as the character of the company and its management. You won’t get this information from the P/B ratio, but it is one of the main benefits of digging into the book value numbers and is well worth the time. That said, looking deeper into book value will give you a better understanding of the company. In some cases, a company will use excess earnings to update equipment rather than pay out dividends or expand operations. While this dip in earnings may drop the value of the company in the short term, it creates long-term book value because the company’s equipment is worth more and the costs have already been discounted. 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 relevant, the value of preferred equity claims should also be subtracted from the numerator, the book value of equity. An online accounting and invoicing application, Deskera Books is designed to make your life easier. This all-in-one solution allows you to track invoices, expenses, and view all your financial documents from one central location.

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. Comparing the book value per share of a company with its market value per share helps investors measure its true value. When the book value per share is higher than its market value, the stock is undervalued; the stock is overvalued when the book value per share is lesser than its market value. Book value per share differs from the market value per share in that it displays the actual share value of a company, instead of the one on stock market indices. This is the primary reason why investors prefer to look at the book value per share to avoid investing in undervalued or overvalued stock. Ellington Financial is externally managed and advised by Ellington Financial Management LLC, an affiliate of Ellington Management Group, L.L.C.

Investors can calculate valuation ratios from these to make it easier to compare companies. Among these, the book value and the price-to-book ratio (P/B ratio) are staples for value investors. Book value per share is just one of the methods for comparison in valuing of a company.

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