How is Book Value Per Share Calculated and Why Does it Matter?

Book Value Per Share Formula

We know that the stock market reflects a stock's worth based on market emotions. But we have to consider some measure that depicts the true or book value of a stock based on its financial fundamentals. The answer to this is Book Value Per Share (BVPS).

BVPS is quite relevant for those looking to invest in stocks. We compare book value per share with the stock price to determine whether we should buy a stock or not. 

For instance, if Company A has a stock price of $40, but its book value per share is $55, then it is undervalued and you might consider waiting for it to catch up to its true value. 

Similarly, if Company B has a market price of $300 and book value per share of $250, then it means it is overvalued, and you might consider selling it, considering other factors as well.

BVPS is calculated by dividing the company's total asset valueby the current number of outstanding shares. This shows the worth of each individual share in the corporation.

We have to take into account that BVPS is not the only metric to determine the value of each share. There are additional factors and ratios to keep into account when investing in stocks. But BVPS can serve as a valuable tool for investors to make sound investment decisions.

How to Calculate Book Value Per Share?

BVPS is calculated by the following formula:

BVPS = (Total Assets – Total Liabilities) / Outstanding Shares

Let's take the example of Apple.

Total asset = $351 billion

Total liabilities = $288 billion

No. of shares outstanding = 17 million

Here, the book value per share would be $3.78 ($351 billion – $288 billion / 17 million).

Why is Book Value Per Share Important?

  • When we consider BVPS, it means that we are evaluating a company's financial stability. More specifically, as company's assets and its share price.
  • If you want to know if the stock price of a company is appropriately priced, BVPS will come handy. It will tell you whether a stock's price is undervalued or overvalued. This is done by calculating its worth driven by its fundamentals. We can use BVPS to determine which gives the best investment venue by comparing various companies within the same industry.
  • If a company's book value per share is greater than book value per share of its competitors, it indicates that it means that its asset base is healthier.
  • BVPS can tell you whether a stock's price is too low or too high. The growth of BVPS is determined by a host of operational factors. These include whether a company retains its earnings, reduces costs by repurchasing its own shares, or decreases the valuation of its assets in the financial records.

How to Interpret BVPS and What to Look for While Investing

When you use book value per share (BVPS) to determine whether you should buy or sell stocks, you should keep these points in mind:

  • If you want to find out whether the stock you are considering investing in is undervalued or overvalued, you use BVPS. When a stock is undervalued, its market price would be lower than the BVPS. If it is overvalued, the market price would be higher than the BVPS.
  • An increase in BVPS may signal that the asset base of a company is multiplying. This could mean that it has greater opportunities for growth rendering it a more appealing investment.
  • BVPS offers insight into a company's economic well-being and consistency by displaying its net value per share.
  • Comparing BVPS within the same industry can help identify potential investment prospects. Or assess the competitive position of a company.
  • It is important to keep in mind that BVPS comes with restrictions. It does not account for non-tangible assets. It relies on past expenses instead of present market prices. Therefore, it is crucial to consider it in simultaneously with other factors when making investment choices.

Factors that affect a Company’s Book Value Per Share

There are various important factors that can impact a company's book value per share (BVPS):

  • Different accounting methods can have a notable effect on the Book Value per Share. This includes evaluating the past price against the present market worth.
  • By nature, such as companies in the manufacturing industry, have a higher amount of tangible assets. They generally have a higher Book Value Per Share (BVPS) if compared with those with intangible assets. These include companies, such as, service based firms. Intangible assets include patents and goodwill. These figures are excluded from the calculation.
  • When a company issues more shares, it reduces BVPS. But when it repurchases shares, BVPS is raised. Failure to include intangible assets, such as patents and trademarks, results in the underestimation of companies that possess substantial intangible assets.
  • If depreciation costs rise and inventory is mishandled, then it can decrease BVPS. This can reduce the worth of assets listed on the balance sheet.
  • A higher BVPS is achieved when a firm takes on more debt or issues additional equity. But it decreases through reducing debt or buying back shares.

Example of a Hypothetical Company

Let's consider a hypothetical Fintech company that went public two years ago. We will calculate its book value of equity per share using the following financial data:

  • Common Stock and Additional Paid-In Capital (APIC): $1.2 billion
  • Retained Earnings: $600 million
  • Other Comprehensive Income (OCI): $100 million

With these figures, we can determine the book value of equity to be $1.9 billion.

Assuming that the company has a weighted average of 1.5 billion common shares outstanding, we can calculate the Book Value Per Share (BVPS) for Year 1 as follows:

BVPS Year 1=Total Equity / Number of Shares=1.9 billion /1.5 billion=$1.27

For the next projection period, Year 2, we will extend each operating assumption from Year 1. Therefore, the BVPS remains $1.27.

However, we will consider the change in the market share price. Let's assume the trading price in Year 0 was $25.00 and increased to $32.50 in Year 2, representing a 30% year-over-year increase.

By multiplying the diluted share count of 1.5 billion by the corresponding share price for the year, we can calculate the market capitalization for each year as follows:

  • Market Capitalization, Year 1: $37.5 billion
  • Market Capitalization, Year 2: $48.75 billion

Despite the increase in share price and market capitalization, the book value of equity per share (BVPS) remained unchanged between Year 1 and Year 2.

BVPS Year 1=$1.27

BVPS Year 2=$1.27

Please note that the book value of equity (BVE) may not fully capture the company's true value unless a company updates certain assets and liabilities on its balance sheet to their fair market values (FMV).

Discrepancies between the book value and market value of equity are common, as seen in many companies.

Examples of Companies with High and Low Book Value Per Share (as of 2024)

Here are a few examples of companies with high and low book value per share:

BVPS for AAPL MSFT AMZN TSLA

Using data from Wisesheets, you can easily get the company's historical quarterly and annual book value per share as well as countless other important key metrics such as ROIC, PE, ROE, EPS, etc. as follows:

PE Ratio, ROE, ROIC for NVDA CSCO TXN etc.

Conclusion

Now you know how to calculate Book Value Per Share (BVPS). You are also aware that BVPS gives you a straightforward look at a company's worth based on its book value which is driven by its assets. But you shouldn't confine yourself to only this metric. Even then, when you know the BVPS, you should consider other metrics to help you make smarter investment choices.

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing and facilitating over a billion dollars in commercial real estate deals.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies.

That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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