This formula shows the net asset value available to common shareholders, excluding any preferred equity. Nevertheless, most companies with expectations to grow and produce profits in the future will have a book value of equity per share lower than their current publicly traded market share price. 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. 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.

If the BVPS increases, the stock is perceived as more valuable, and the price should increase. Book value per share is determined by dividing common shareholders’ equity by total number of outstanding shares. We need to divide the shareholders’ equity available to common stockholders by the number of common shares. BVPS relies on the historical costs of assets rather than their current market values.

1. Book value per common share (or, simply book value per share – BVPS) is a method to calculate the per-share book value of a company based on common shareholders’ equity in the company.
2. The formula for BVPS involves taking the book value of equity and dividing that figure by the weighted average of shares outstanding.
3. Preferred stock is usually excluded from the calculation because preferred stockholders have a higher claim on assets in case of liquidation.
4. The difference between a company’s total assets and total liabilities is its net asset value, or the value remaining for equity shareholders.
5. Alternatively, another method to increase the BVPS is via share repurchases (i.e. buybacks) from existing shareholders.
6. 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.

A company can use a portion of its earnings to buy assets that would increase common equity along with BVPS. Or, it could use its earnings to reduce liabilities, which would also increase its common equity and BVPS. On the other hand, book value per share is an accounting-based tool that is calculated using historical costs. Unlike the market value per share, the metric is not forward-looking, and it does not reflect the actual market value of a company’s shares. Similarly, if the company uses $200,000 of the generated revenues xero order management to pay up debts and reduce liabilities, it will also increase the equity available to common stockholders. Because book value per share only considers the book value, it fails to incorporate other intangible factors that may increase the market value of a company’s shares, even upon liquidation.

The book value per share is just one metric that you should look at when considering an investment. It’s important to remember that the book value per share is not the only metric that you should consider when making an investment decision. In today’s blog, we deep dive into what is book value of a share, what it indicates, and its role for investors. At the same time, we use book value in the case of the ROE formula when we calculate the ROE per share. The book value of Google in 2008 was $44.90 per share and had increased by 348% to $201.12 per share by the end of 2016. Clear differences between the book value and market value of equity can occur, which happens more often than not for the vast majority of companies.

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It may be that a company has equipment that gets depreciated rapidly, but the book value is overstated. In contrast, a company may have an asset that does not depreciate rapidly, like oil and property, but it has been overlooked and has understated book value. The answer is yes because the company can be punished/pushed unfairly by the market due to stated book value that may not represent the actual value of its assets.

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

In this case, each share of stock would be worth $0.50 if the company got liquidated. Book value per share is the portion of a company’s equity that’s attributed to each share of common stock if the company gets liquidated. It’s a measure of what shareholders would theoretically get if they sold all of the assets of the company and paid off all of its liabilities. Another way to increase BVPS is for a company to repurchase common stock from shareholders.

Book Value Per Common Share (BVPS): Definition and Calculation

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. 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. The book value of a company represents the net asset value (total assets – total liabilities) of a company.

Market demand may increase the stock price, which results in a large divergence between the market and book values per share. Next, we need to calculate how much shareholders’ equity is available to the common stockholders. If the investors can find terminal value formula out the book value of common stocks, they will be able to figure out whether the market value of the share is worth it. We need to calculate how much shareholders’ equity is available to the common stockholders. BVPS is significant for investors because it offers a snapshot of a company’s net asset value per share. By analyzing BVPS, investors can gain insights into a company’s financial health and intrinsic value, aiding in the assessment of whether a stock is over or undervalued.

How Does BVPS Differ from Market Value Per Share?

In return, the accumulation of earnings could be used to reduce liabilities, which leads to higher book value of equity (and BVPS). 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). Preferred stock is usually excluded from the calculation because preferred stockholders have a higher claim on assets in case of liquidation. It excludes value of intangible assets from book value of shareholders’ equity used in the normal book value per share calculation.