Book Value Per Share: Definition, Calculation, Importance & Limitations (2024)

Book Value Per Share (BVPS) is a crucial financial metric that indicates the per-share value of a company’s equity available to common shareholders. It helps investors determine if a stock is overvalued or undervalued based on the company’s actual worth.

Book Value Per Share is calculated by dividing the total common equity by the number of outstanding shares.

The formula for calculating BVPS is straightforward:

BVPS = (Total Shareholders’ Equity − Preferred Equity) / Total Outstanding Shares

This formula shows the net asset value available to common shareholders, excluding any preferred equity.

BVPS is significant for investors because it offers a snapshot of a company’s net asset value per share. It is essential for making informed investment decisions. 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.

Investors use BVPS to gauge whether a stock is trading below or above its intrinsic value.

If a company’s BVPS is higher than its market value per share (the current stock price), the stock may be considered undervalued. This situation suggests a potential buying opportunity, as the market may be undervaluing the company’s actual worth.

Conversely, if the market value per share exceeds BVPS, the stock might be perceived as overvalued. BVPS offers a baseline, especially valuable for value investors looking for opportunities in underpriced stocks.

Several factors can influence a company’s operating margin. Some key ones include:

Asset Appreciation/Depreciation: Changes in the value of a company’s assets impact its equity and, consequently, its BVPS.

Liabilities: An increase in liabilities without a corresponding increase in assets reduces shareholders’ equity and BVPS.

Share Issuance or Buybacks: Issuing more shares dilutes BVPS, while share buybacks increase BVPS by reducing the number of outstanding shares.

Retained Earnings: Profits retained in the company increase total equity, thus raising BVPS.

While Book Value Per Share can be a helpful indicator of a company’s tangible net assets, it has several limitations that investors should be aware of.

Exclusion of Intangible Assets

One of the primary limitations of BVPS is its exclusion of intangible assets. BVPS is calculated by considering the book value of tangible assets only, which are total assets minus intangible assets like copyrights, trademarks, and patents. This exclusion can significantly undervalue companies, especially in technology and pharmaceutical sectors, where intangible assets represent a substantial portion of the company’s value.

Reliance on Historical Costs

BVPS relies on the historical costs of assets rather than their current market values. This approach can lead to significant discrepancies between the book value and the actual market value of a company’s assets. Over time, the historical cost basis may not reflect the true worth of assets due to inflation, depreciation, and changes in market conditions, leading to potential misvaluation of the company’s stock.

Periodic Calculation and Publication

BVPS is typically calculated and published periodically, such as quarterly or annually. This infrequency means that BVPS may not always reflect the most up-to-date value of a company’s assets and liabilities.

Sector-Specific Limitations

The relevance of BVPS can vary greatly across different sectors. For asset-heavy industries, BVPS might provide a reasonable estimate of value. However, for sectors like technology and pharmaceuticals, where intellectual property and ongoing research and development are crucial, BVPS can be misleading.

InvestingPro offers detailed insights into companies’ Book Value Per Share including sector benchmarks and competitor analysis.

BVPS represents the accounting value of each share based on the company’s equity, while the market value per share is determined by the stock’s current trading price in the market.

Why is BVPS important for value investors?

Value investors use BVPS to identify stocks that are trading below their intrinsic value, indicating potential undervaluation.

Can BVPS be negative?

Yes, if a company’s liabilities exceed its assets, the BVPS can be negative, signaling potential financial distress.

How often is BVPS calculated?

BVPS is typically calculated quarterly or annually, coinciding with the company’s financial reporting periods.

Is BVPS relevant for all types of companies?

BVPS is more relevant for asset-heavy companies, such as manufacturing firms, where physical assets constitute a significant portion of the balance sheet.