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Book Value: Definition, Meaning, Formula, and Examples

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. 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.

  1. Book value per share (BVPS) is a quick calculation used to determine the per-share value of a company based on the amount of common shareholders’ equity in the company.
  2. Total liabilities are the total debt and financial obligations payable by the company to organizations or individuals at any defined period of time.
  3. Book value per share is just one of the methods for comparison in valuing of a company.

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 small business banking 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. Assets are items of monetary value used over time to produce a benefit for the asset’s holder.

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In return, the accumulation of earnings could be used to reduce liabilities, which leads to higher book value of equity (and BVPS). For companies seeking to increase their book value of equity per share (BVPS), profitable reinvestments can lead to more cash. For example, if a company has a total asset balance of $40mm and liabilities of $25mm, then the book value of equity is $15mm. As suggested by the name, the “book” value per share calculation begins with finding the necessary balance sheet data from the latest financial report (e.g. 10-K, 10-Q). It depends on a number of factors, such as the company’s financial statements, competitive landscape, and management team. Even if a company has a high book value per share, there’s no guarantee that it will be a successful investment.

If a company owns assets, it includes them in the balance sheet to maintain accurate accounting records. The price-to-book (P/B) metric allows investors to compare a company’s market capitalization to its book value, in the form of a ratio. If a company’s market cap is twice as high as its book value, it will have a P/B ratio of 2.0x. If a company’s market cap is three times as high as its book value, it will have a P/B ratio of 3.0x. As companies acquire new assets, those assets are recorded on the balance sheet at their cost.

A part of a company’s profits may be used to purchase assets that raise both common equity and BVPS at the same time. Alternatively, it may utilize the money it takes to pay down debt, increasing both its common equity and its book value per share (BVPS). A second method to boost BVPS is by repurchasing common stock from existing owners, and many businesses utilize their profits to do so.

Book Value Per Share Calculation Example (BVPS)

You can easily calculate the Book Value per Share using the formula in the template provided.

Now, let’s say that XYZ Company has total equity of $500,000 and 2,000,000 shares outstanding. In this case, each share of stock would be worth $0.50 if the company got liquidated. 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. While BVPS considers the residual equity per-share for a company’s stock, net asset value, or NAV, is a per-share value calculated for a mutual fund or an exchange-traded fund, or ETF. For any of these investments, the NAV is calculated by dividing the total value of all the fund’s securities by the total number of outstanding fund shares.

Book value per share (BVPS) is calculated as the equity accessible to common shareholders divided by the total number of outstanding shares. This number calculates a company’s book value per share and serves as the minimal measure of its equity. 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.

How Can be Book Value Per Share Increased?

If assets are being depreciated slower than the drop in market value, then the book value will be above the true value, creating a value trap for investors who only glance at the P/B ratio. If XYZ uses $300,000 of its earnings to reduce liabilities, common equity also increases. Book value per share (BVPS) is the ratio of equity available to common shareholders divided by the number of outstanding shares. This figure represents the minimum value of a company’s equity and measures the book value of a firm on a per-share basis. Now, let’s say that Company B has $8 million in stockholders’ equity and 1,000,000 outstanding shares.

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. In the example from a moment ago, a company has $1,000,000 in equity and 1,000,000 shares outstanding. Now, let’s say that the company invests in a new piece of equipment that costs $500,000. The book value per share would still be $1 even though the company’s assets have increased in value.

Book Value Per Share Formula in Excel (With Excel Template)

To get BVPS, you divide total shareholders’ equity by the total number of outstanding common shares. Since public companies are owned by shareholders, this is also known as the total shareholders’ equity. The book value includes all of the equipment and property owned by the company, as well as any cash holdings or inventory on hand. It also accounts for all of the company’s liabilities, such as debt or tax burdens. To get the book value, you must subtract all those liabilities from the company’s total assets. Value investors prefer using the BVPS as a gauge of a stock’s potential value when future growth and earnings projections are less stable.

Failing bankruptcy, other investors would ideally see that the book value was worth more than the stock and also buy in, pushing the price up to match the book value. 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.

Remember, even if a company has a high book value per share, there’s no guarantee that it will be a successful investment. 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.

To put it another way, a rise in the anticipated profits or growth rate of a business should raise the market value per share. Some investors may use the book value per share to estimate a company’s equity-based on its market value, which is the price of its shares. If a business is presently trading at $20 but has a book value of $10, it is being sold for double its equity. A P/B ratio of 1.0 indicates that the market price of a company’s shares is exactly equal to its book value. For value investors, this may signal a good buy since the market price of a company generally carries some premium over book value. If the book value is based largely on equipment, rather than something that doesn’t rapidly depreciate (oil, land, etc.), it’s vital that you look beyond the ratio and into the components.

One of the most frequent ratios tracked by value investors is the Price / Book ratio, which measures a company’s market value versus its book value. A company that has assets of $700 million and liabilities of $500 million, would have a book value, or shareholders’ equity, of $200 million. The formula is the same for calculating shareholders’ equity or stockholders’ equity.






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