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What Is Book Value Per Share (BVPS)?
Book value per share (BVPS) measures a company’s total assets minus its liabilities and then divides the total by the number of shares outstanding.
Theoretically, BVPS is the amount that shareholders would be owed if the firm went out of business, sold all of its tangible assets, and paid all of its debts.
Stock analysts use BVPS to judge whether a stock is underpriced or overpriced based on a comparison of its current market value to its book value.
Key Takeaways
- Book value per share (BVPS) is a number used by stock analysts to determine whether a stock is currently underpriced or overpriced.
- When a company’s BVPS is higher than its current stock price, the stock appears to be undervalued in the market.
- BVPS is the amount that would be returned to shareholders in the event the company goes into bankruptcy.
Measuring Book Value Per Share (BVPS)
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 receive if the firm is liquidated, all tangible assets are sold, and all liabilities are paid.
B
V
P
S
=
Total Equity
−
Preferred Equity
Total Shares Outstanding
BVPS\ =\ \frac{\text{Total Equity}\ -\ \text{Preferred Equity}}{\text{Total Shares Outstanding}}
BVPS = Total Shares OutstandingTotal Equity − Preferred Equity
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.
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.
Important
Since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred stock is subtracted from shareholders’ equity to derive the equity available to common shareholders.
Example of BVPS
Assume that XYZ Manufacturing has a common equity balance of $10 million and 1 million shares of common stock are outstanding. This means that the BVPS is ($10 million / 1 million shares), or $10 per share. If XYZ can generate higher profits and use those profits to buy assets or reduce liabilities, then the firm’s common equity increases.
If the company generates $500,000 in earnings and uses $200,000 of the profits to buy assets, then its common equity increases along with BVPS. If XYZ uses $300,000 of its earnings to reduce liabilities, then common equity also increases.
Another way to increase BVPS is for a company to repurchase common stock from shareholders. Many companies use earnings to buy back shares.
Assume XYZ repurchases 200,000 shares of stock, and 800,000 shares remain outstanding. If common equity is $10 million, BVPS increases to $12.50 per share.
What Does Book Value Per Share (BVPS) Tell Investors?
BVPS is the sum that shareholders would receive if the firm is liquidated. Investors use BVPS to gauge whether a stock price is undervalued by comparing it to the firm’s market value per share.
How Can Companies Increase BVPS?
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.
How Does BVPS Differ From Market Value Per Share?
The calculation for BVPS uses historical costs. However, the market value per share—a forward-looking metric—accounts for a company’s future earning power. As a company’s potential profitability, or its expected growth rate, increases, the corresponding market value per share will also increase.
The Bottom Line
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.
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