Companies with lots of machinery, like railroads, or lots of financial instruments, like banks, tend to have large book values. In contrast, video game companies, fashion designers, or trading firms may have little or no book value because they are only as good as the people who work there. Book value is not very useful in the latter case, but for companies with solid assets, it’s often the No.1 figure for investors. Book value is the amount found by totaling a company’s tangible assets (such as stocks, bonds, inventory, manufacturing equipment, real estate, and so forth) and subtracting its liabilities. In theory, book value should include everything down to the pencils and staples used by employees, but for simplicity’s sake, companies generally only include large assets that are easily quantified. The next assumption states that the weighted average of common shares outstanding is 1.4bn.

Significant differences between the book value per share and the market value per share arise due to the ways in which accounting principles classify certain transactions. To get BVPS, you divide the figure for total common shareholders’ equity by the total number of outstanding common shares. To obtain the figure for total common shareholders’ equity, take the figure for total shareholders’ equity and subtract any preferred stock value.

Book Value Per Share Formula

Thence, if this company were to be liquidated on 31st March 2020, all its shareholders would be entitled to receive a portion of Rs. 160,000, according to their stake in that organisation. Book value is calculated by taking the aggregate value of all its assets and deducting all the liabilities from depreciation and amortization on the income statement it. Assets include both current and fixed assets, and liabilities include both current liabilities and non-current liabilities.

How to Calculate Book Value Per Share (BVPS)

1. Using the average number of shares in the formula is essential since the number at the end of the period may factor in a recent buyback or stock issuance, distorting the figure.
2. In theory, book value should include everything down to the pencils and staples used by employees, but for simplicity’s sake, companies generally only include large assets that are easily quantified.
3. The book value of a company is the difference between that company’s total assets and total liabilities, and not its share price in the market.
4. 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.
5. For instance, if a piece of machinery costs Rs. 2 lakh and its accumulated depreciation amount to Rs. 50,000, then the book value of that machinery would come about to be Rs. 1.5 lakh.

Thus, its book value portrays the amount such investors ought to receive at any point in time. However, the market value per share—a forward-looking metric—accounts for a company’s future earning power. As a company’s potential profitability, or its expected growth rate, increases, the corresponding market value per share will also increase. Nevertheless, most companies with expectations to grow and produce profits in the future will have a book value of equity per share lower than their current publicly traded market share price. If we assume the company has preferred equity of $3mm and a weighted average share count of 4mm, the BVPS is $3.00 (calculated as $15mm less $3mm, divided by 4mm shares). Book Value Per Share (BVPS) is a figure that evaluates the value of a company’s claims based on its net assets.

The ratio may not serve as a valid valuation basis when comparing companies from different sectors and industries because companies in other industries may record their assets differently. There is also a book value used by accountants to value the assets owned by a company. This differs from the book value for investors because it is only used internally for managerial accounting purposes. In theory, a low price-to-book-value ratio means you have a cushion against poor performance.

If a company’s share price falls below its BVPS, a corporate raider could make a risk-free profit by buying the company and liquidating it. If book value is negative, where a company’s liabilities exceed its assets, this is known as a balance sheet insolvency. In closing, it’s easy to see why the book value per share is such an important metric. It’s a simple way to compare the value of a company’s net assets to the number of shares that are outstanding.

Book Value: Definition, Meaning, Formula, and Examples

On the other hand, if XYZ uses $300,000 of the earnings to reduce liabilities, common equity also increases. Book value per share (BVPS) tells investors the book value of a firm on a per-share basis. Investors use BVPS to gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. Book value refers to a firm’s net asset value (NAV) or its total assets minus its total liabilities. 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.

However, investors should note that finding BVPS in isolation cannot produce promising analysis. It can be used in conjunction with other metrics like Discounted Cash Flow (DCF) and Price-to-earnings ratio (PE) to reach a somewhat concrete view of an organisation’s potential. Therefore, the book value of Company Arbitrary would be the difference between its total assets and total liabilities. The book value of an organisation is computed after netting the aggregate book value of all the assets against its intangible counterparts and liabilities.

The market value depends on the current market price and how many outstanding shares exist. So, it reflects current prices and changes often as it considers sentiment around future growth in the market. Because book value per share only considers the book value, it fails to incorporate other intangible factors that may increase the market value of a company’s shares, even upon liquidation.

A P/B ratio of 1.0 indicates that the raleigh bookkeeping market price of a share of stock is exactly equal to its book value. For value investors, this may signal a good buy since the market price generally carries some premium over book value. Book value is the value of a company’s assets after netting out its liabilities. It approximates the total value shareholders would receive if the company were liquidated.

Assume XYZ repurchases 200,000 shares of stock, and 800,000 shares remain outstanding. Now, let’s say that Company B has $8 million in stockholders’ equity and 1,000,000 outstanding shares. Using the same share basis formula, we can calculate the book value per share of Company B.

Methods to Increase the Book Value Per Share

This means that each share of the company would be worth $8 if the company got liquidated. Now, let’s say that you’re considering investing in either Company A or Company B. Given that Company B has a higher book value per share, you might find it tempting to invest in that company. However, you would need to do some more research before making a final decision.