What is the book value of equity per share – BVPS?
The book value of equity per share (BVPS) is the equity available to common shareholders divided by the number of shares outstanding. This represents the minimum equity value of a business.
Since preferred shareholders have a higher claim on assets and profits than common shareholders, preferred shares are subtracted from equity to obtain the equity available to common shareholders.
Equity represents the owners’ residual claim on the business after paying the debts. It is equal to the total assets of a business less its total liabilities, which is the net asset value or the book value of the business as a whole.
The formula for BVPS is
BVPS = Total shares outstandingTotal equity – Preferred sharesTheThe
Book value of equity per share (BVPS)
What does the book value of equity per share tell you?
The measure of the book value of equity per share (BVPS) can be used by investors to assess whether a stock price is undervalued, by comparing it to the company’s market value per share. If a company’s BVPS is higher than its market value per share – its current price – then the security is considered undervalued. If the company’s BVPS increases, the stock should be seen to be more valuable and the stock price should increase.
In theory, BVPS is the sum that the shareholders would receive in the event of the liquidation of the business, the sale of all tangible assets and the payment of all liabilities. However, since the assets would be sold at market prices and the book value uses the historical costs of the assets, the market value is considered to be a better floor price than the book value for a business.
If a company’s share price falls below its BVPS, a company can make a risk-free profit by buying the business and liquidating it. If the book value is negative, when a company’s liabilities exceed its assets, this is known as balance sheet insolvency.
Key points to remember
- The book value of equity per share indicates the net asset value of a business (total assets – total liabilities) per share.
- When a stock is undervalued, it will have a higher book value per share compared to its current market price.
- The measure is mainly used by equity investors to assess the stock price of a company.
Example of the use of the book value of equity per share
Suppose, for example, that the balance of common shares of XYZ Manufacturing is $ 10 million and that 1 million common shares are outstanding, which means that the BVPS is ($ 10 million / $ 1 million shares), or $ 10 per share. If XYZ can generate higher profits and use these profits to buy more assets or reduce liabilities, the company’s ordinary equity increases.
If, for example, the company generates $ 500,000 in profit and uses $ 200,000 in profit to buy assets, equity increases with BVPS. On the other hand, if XYZ uses $ 300,000 of profit to reduce the liability, ordinary equity also increases.
Factoring in the repurchase of ordinary shares
Another way to increase BVPS is to buy back common stock from shareholders. Many companies use the profits to buy back shares. Using the XYZ example, assume that the company is buying 200,000 shares and 800,000 shares remain outstanding. If common equity is $ 10 million, BVPS increases to $ 12.50 per share. In addition to share buybacks, a company can also increase BVPS by taking steps to increase the balance of assets and reduce liabilities.
Market value per share vs book value per share
While BVPS is calculated using historical costs, market value per share is a forward-looking measure that takes into account a company’s future earning potential. An increase in the potential profitability of a business or the expected growth rate should increase the market value per share.
For example, a marketing campaign will reduce BVPS by increasing costs. However, if this strengthens the brand value and the company is able to charge high prices or its products, the stock price could far exceed its BVPS.