What is book value per share in the stock market?

The book value per share (BVPS) is derived by dividing the equity accessible to common stockholders by the number of outstanding shares. The book value per share, when contrasted to the current market value per share, can provide insight into how a company’s stock is valued. If the value of BVPS exceeds the market value per share, the stock of the company is considered undervalued.

The book value is used as an indicator of a company’s stock value, and it can be used to forecast the likely market price of a share at a specific period in the future.

When calculating a company’s book value per share, we base the calculation on common stockholders’ equity, and preferred shares should be omitted from the value of equity. Because preferred investors are ranked higher than common stockholders during liquidation. The BVPS represents the amount of equity that remains after all debts have been paid and the company’s assets have been liquidated.

How to calculate book value per share?

When calculating a company’s book value per share, we base the calculation on common stockholders’ equity, and preferred shares should be omitted from the value of equity. Because preferred investors are ranked higher than common stockholders during liquidation. The BVPS represents the amount of equity that remains after all debts have been paid and the company’s assets have been liquidated.

Formula for Book Value Per Share

The formula for calculating the book value per share is given as follows:

Book value per share = (Stockholders’ Equity – Preferred Stock) ÷ Average shares outstanding

Example- XYZ Limited Company has Rs 20 Lakh of stockholder’s equity, out of which Rs 5 Lakh are preferred stocks. The company has an average of 3 Lakh shares outstanding during the period. Using this data, we can calculate the Book Value per Share :

BVPS = (Rs 20,00,000 – Rs 5,00,000) / 3,00,000 BVPS = Rs15,00,000 / 3,00,000 BVPS = Rs 5

How to Raise Book Value Per Share?

A company can raise its book value per share using one of two methods:

1. Buy back common stock

Buying back common stock from shareholders is one of the most prevalent methods of raising the book value per share. Assume, for the sake of argument, that the corporation repurchases 50,000 common stocks from its stockholders. It will lower the number of outstanding shares to 2.5 Lakh (3,00,000 – 50,000). The redesigned BVPS will look like this: BVPS = $15,00,000 / 2,50,000 = Rs 6

The BVPS rises from Rs 5 to Rs 6 after the company repurchases 50,000 common shares from its shareholders.

2. Increase assets while decreasing liabilities

A corporation can also raise its book value per share by reinvesting income in new assets or reducing liabilities. For example, if XYZ Limited Company earns Rs 1 Crore over the year and spends Rs 30,00,000 on additional assets for the company, it will increase common equity and thus the book value per share (BVPS).

Similarly, if the corporation utilizes Rs 20,00,000 of the generated earnings to pay down debts and reduce liabilities, the equity available to common stockholders will increase.

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Limitations of Book Value per Share

Book value is not predictive

The market value per share is a forward-looking estimate of what the investment community feels a company’s shares are worth; the book value per share, on the other hand, is an accounting measure that is not at all forward-looking. The two measurements are based on distinct data. As a result, comparing the two measures is risky

Some assets are undervalued based on book value

The book value idea tends to undervalue (sometimes significantly) a variety of assets. For example, the value of a brand, which has been built up over many years of marketing expenditures, may be a company’s principal asset but not appear in the book value figure at all. Similarly, the value of in-house research and development efforts may be quite high, yet in most situations, this spending is charged directly to expense. These factors can result in a huge gap between book value and market value.

Book Value per Share Vs Market Value per Share

Some of the tools used to analyze the worth of a company’s stocks include the book value per share and the market value per share. The market value per share is the current price of a company’s shares, and it is the price at which investors are willing to pay for ordinary stocks. The market value is forward-looking and takes into account a company’s ability to earn money in the future. The market value per share is predicted to rise more as the company’s expected growth and profitability rise.

Book value per share, on the other hand, is an accounting-based tool that is computed using previous costs. This measure, unlike market value per share, is not forward-looking and does not reflect the real market value of a company’s shares.

The BVPS is a conservative method for investors to determine the true worth of a business’s stock by calculating what owners will own after the company liquidates and all debts are paid off. When future growth and earnings estimates are less solid, value investors prefer utilizing the BVPS as a gauge of a stock’s prospective worth.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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