Book value of a company represents assets minus liabilities of the business. It’s the amount that will be distributed to stockholders in case the company is liquidated.
If Book value is negative, it means the company’s liabilities exceeds assets. Its also called shareholders equity or net assets of a company.
To calculate Book value per share or BVPS, you need to divide shareholder’s equity by average number of common stocks. Shareholder’s equity can be obtained by subtracting company’s liabilities from its assets.
Assets includes current and fixed assets such as land, building, machinery etc. Total liabilities is what business owes to outsiders such as creditors and debts from banks or financial institutions. This means shareholders equity is the net of what company owns and what it owes.
Book value per share formula = (Total common stockholders equity – preferred stock) / number of common shares outstanding
BVPS always indicates the per share value of a company remaining for common stockholders after all assets are liquidated and liabilities are settled. It never takes preferred stockholders into account.
This means book value per share of common stock is the amount of money each share would receive based on the balance sheet if the company is liquidated today
Stock buyback can reduce BVPS if market price at which stock is repurchased is higher than the current book value per share.
Market price of a stock is different from it’s book value. Market price is the current stock price that market participants are willing to pay. Market price increases based on increase in estimated profitability and expected growth.
You can compare market price with the book value per share (BVPS) to know whether the stock is under priced or over priced. If BVPS is higher than the market’s current stock price, then the stock is under priced or trading at a discount. If BVPS is less than the market’s current stock price, then the stock is trading at a premium.
Below in this article, we have given two examples to help you understand how to calculate book value per share of a company.
Company XYZ has Rs. 200 lakhs of shareholder’s equity, 50 lakhs of shares outstanding and 50 lakhs worth of preferred stock. Book value per share of this company = (shareholders equity – preferred stock)/outstanding number of shares = (200-50)/50 = 3
Company ABC has total assets of Rs. 2,50,000, total liabilities of Rs. 1,80,000, preferred stock of Rs. 20,000 and number of common stocks outstanding is 2000 shares.
In this case, shareholders equity including preferred stock = total asset – total liabilities = Rs. 250000 – Rs. 180000 = Rs. 70,000
To find out common shareholders equity, we need to deduct the amount of preferred stock.
Common stock Shareholders equity = Rs. 70000 – Rs. 20000 = Rs. 50000
Book value per share = Common shareholders equity / outstanding common stock = Rs. 50000/2000 = Rs. 25
While considering book value per share as one of the criteria for investing decision, its suggested to look for the actual valuation of assets in the balance sheet. A land may be at cost on the balance sheet, whereas market price would be different. Similarly, a plant and machinery may have no use today due to technical upgradation. You need to go deeper into the company’s financial statements before taking any decision.