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What Is Book Value Per Share (BVPS)?

If your goal is to make money in the stock market, you should understand the term book value per share (BVPS). Investors who are always looking for the next up and coming stock will utilize book value per share to identify stocks that are undervalued.

We will explore how book value per share works and how it can help guide you with your investment decisions.

How Does Book Value Per Share Work? 

Book value per share is a calculation that helps investors identify healthy but under-rated stocks. It provides a way for investors who are value-minded to find a good stock that comes at a “discount”.

BVPS identifies the book value of a publicly traded stock. It is basically the total assets of the publicly traded company with liabilities deducted. When comparing the book value per share to the share price, if the BVPS is higher, the stock is undervalued.

What Is the Formula for BVPS?

Calculating BVPS is not a complicated formula. You subtract the company’s preferred stock from stakeholder’s equity, then divide that number by the average shares outstanding.

BVPS = (Stockholders’ Equity – Preferred Stock) / Average Shares Outstanding

How Do You Calculate Book Value Per Share?

The above formula is what you will need to calculate the book value per share. First, you need to calculate the book value. This is the stockholders’ equity minus preferred stock. After that, you will divide that figure by the number of common shares.

For example, Company A has $16 million in stockholder’s equity. Out of the $16 million, $4 million are preferred stocks. Preferred stocks are shares of ownership in the corporation that have a priority claim before common shares. 

Currently, Company A has an average of 2 million shares outstanding. Based on this information, you would calculate BVPS as follows:

BVPS = ($16,000,000 – $4,000,000) / 2,000,000

= $12,000,000 / 2,000,000

= $6

What Is Book Value?

Book value is essentially the worth of a public company based on its assets. This is the amount the company would be worth if it were to be liquidated.

Book value shows the value of all the assets minus expenses and debts (which are known as liabilities).

What Is a Good Book Value Per Share?

There is no one-size-fits-all value that is “good” for BVPS because each industry is different. For certain industries, a value under 1 is considered good, however other industries a value of 3 is considered good. It depends on the performance of the desired industry.

One thing to remember is that the stock that has a lower book value per share has the most potential to grow down the line. It is an undervalued stock that should perform well in the future.

What Does Book Value Per Share Tell You?

Book value shows the literal value of the business according to its financial statements. Book value per share tells investors if the company stocks are overpriced or underpriced. If the BVPS price is lower than the company’s stock price, it signifies to an investor that the stock is possibly overvalued.

Alternatively, if the BVPS is more than the company’s stock price, it signifies that investors can buy shares in a company for less than they are actually worth.

In the event that a company is liquidated, BVPS is the amount shareholders would receive per share.

How Is Book Value Per Share Used?

Book value per share is a valuation technique that investors and companies can utilize to determine if stock is over or undervalued. It calculates the real value of a company’s stock, which is the amount that the company will owe investors if they liquidate, after all their debts have been paid.

How Do You Increase BVPS?

There are two ways that a company can increase the BVPS. The first option is to repurchase common stocks. The company can buy back common stocks from its shareholders.

If we use the example above and the company repurchases 500,000 common stocks, it reduces the number of current shares from 2 million to 1.5 million (2,000,000 – 5000,000). You can see how this increases BVPS by the updated calculation:

BVPS = ($16,000,000 – $4,000,000) / 1,500,000

= $12,000,000 / 1,500,000

= $8

The second way a company can increase BVPS is by increasing its assets and reducing liabilities. Since the BVPS is calculated by assets and liabilities, if the company focuses on adding more assets and/or paying debts to reduce liabilities, the BVPS will increase.

Why Does BVPS Matter?

Book value per share matters because it shows what the company’s stock is worth. It provides investors with another key piece of information to help guide their investment decisions. It also allows companies to reevaluate to determine if they need to make moves to increase BVPS.

Market Value Per Share vs. Book Value Per Share

While market value per share and book value per share are both tools to evaluate the value of stocks, they are very different. Market value per share is the formula that determines what investors are willing to pay for common stocks. It looks at the future, taking into account a company’s earning abilities with expected growth and profitability.

As we explored above, BVPS is the accounting-based tool that utilizes the current financial statements to determine if a company stock is presently undervalued.

What Are Limitations of Book Value per Share?

Book value per share does not really tell you everything you need to know as an investor. You have to do additional research to compare BVPS to the market price and other tools to determine how it could impact you.

BVPS is also only representative of the current financial standings of the company. It does not provide any growth estimates.

Lastly, different industries should gauge BVPS differently. If a company has inventory stored in a warehouse, all the inventory is shown on their books which will impact its BVPS. On the flip side, tech companies that provide software service but do not have assets stored somewhere should be valued differently in relation to BVPS.

Picking the Right Stocks Using BVPS

When you are selecting stocks to add to your portfolio, you should consider utilizing the BVPS calculation to help guide your decisions. If you find a stock that is trading wildly different that its market value, dig in a little further to see if you can get a great stock at a discounted price. But don’t be afraid to utilize other tools, especially the help of your financial advisor.