Learn more about how to calculate this ratio, what it tells you, and how investors use it to guide their decisions.
What Is Book Value per Share?
Book value per share is one way of gauging the value of a stock. To better understand book value per share, it helps to break down each aspect of the ratio. The book value is the total equity, or net asset value, of a company. Since public companies are owned by shareholders, this is also known as the total shareholders’ equity. The book value includes all of the equipment and property owned by the company, as well as any cash holdings or inventory on hand. It also accounts for all of the company’s liabilities, such as debt or tax burdens. To get the book value, you must subtract all those liabilities from the company’s total assets. These values will be found on a company’s balance sheet. The share aspect of this ratio refers to the common shares of the company. These are the stocks that can be bought or sold on an exchange. Breaking down the book value on a per-share may help investors decide whether they think the stock’s market value is overpriced or underpriced.
How Do You Calculate Book Value per Share?
To calculate the book value per share, you must first calculate the book value, then divide by the number of common shares. Also, since you’re working with common shares, you must subtract the preferred shareholder equity from the total equity. Otherwise, the book value per share would be inflated and inaccurate.
How Book Value per Share Works
Generally, the book value per share is used by investors (especially value investors) to determine whether a share is fairly valued. If the BVPS is less than the price of the stock, then that tells an investor that the stock could be overvalued—it costs more than the assets it’s entitled to. On the other hand, when the BVPS is more than the stock price, that means an investor can essentially buy a share in a company’s assets for less than those assets are actually worth. Imagine that a company has $20 million worth of stockholders’ equity, $5 million worth of preferred stock, and an average of 5 million shares outstanding. The calculation of its book value per share is:
(Shareholders’ equity - preferred equity) ÷ average number of common shares($20 million - $5 million) ÷ 5 million$15 million ÷ 5 million$3 book value per share
Limitations of Book Value per Share
One limitation of book value per share is that, in and of itself, it doesn’t tell you much as an investor. Investors must compare the BVPS to the market price of the stock to begin to analyze how it impacts them. Another limitation is that BVPS is a conservative analysis of a company. It simply measures the present financial standing of the company. That doesn’t allow for growth estimates. Book value also favors businesses with physical assets. Companies that store inventory in a warehouse can count all of that inventory toward their book value. However, tech companies that specialize in creating software don’t have an asset that is stored somewhere, and they don’t require expensive industrial equipment to produce their product. They may generate sales with that software, but there isn’t a warehouse full of software code that investors can look at to gauge future sales.
