What is the book value per common share?
Book value per common share (or simply book value per share – BVPS) is a method of calculating the value per share of a company based on equity attributable to shareholders of the company. In the event of the dissolution of the company, the book value per common share indicates the dollar value remaining for common shareholders after the liquidation of all assets and the payment of all accounts receivable.
Understanding the book value
The book value per common share formula is
The book value per common share (formula below) is an accounting measure based on historical transactions:
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What does BVPS tell you?
The book value of common shares in the numerator reflects the initial proceeds that a business receives from the issuance of common shares, increased profits or decreased losses, and decreased dividends paid. Company share buybacks decrease the carrying amount and the total number of common shares. Share buybacks take place at the current share price, which can result in a significant reduction in the carrying value per common share of a business. The number of common shares used in the denominator is generally an average number of diluted common shares for the last year, which takes into account additional shares beyond the number of basic shares which may come from stock options, warrants, preferred shares and other convertible instruments.
Key points to remember
- The book value per common share calculates the value per share of a company according to the equity attributable to the common shareholders of the company.
- Since preferred shareholders have a higher claim on assets and profits than common shareholders, preferred equity is subtracted from equity to obtain the equity available to common shareholders.
- If a company’s BVPS is higher than its market value per share, its stock can be considered undervalued.
As a hypothetical example, assume 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.
The difference between the market value per share and the book value per share
Market value per share is the current market price of a company and reflects a value that market participants are willing to pay for its common stock. Book value per share is calculated using historical costs, but market value per share is a forward-looking measure that takes into account a company’s earning capacity in the future. With the increase in the estimated profitability of a company, the expected growth and the security of its activities, the market value per share increases. Significant differences between the book value per share and the market value per share are due to the way in which the accounting principles classify certain transactions.
For example, consider the brand value of a business, which is built through a series of marketing campaigns. United States generally accepted accounting principles (GAAP) require that marketing costs be expensed immediately, which reduces the carrying amount per share. However, if advertising efforts improve a company’s product image, it can charge high prices and create brand value. Market demand can increase the share price, resulting in a wide divergence between the market and book values per share.
The difference between the book value per common share and the net asset value (NAV)
While BVPS considers residual equity per share for the shares of a company, the NAV or NAV is a value per share calculated for a mutual fund or exchange traded fund, or ETF. For one of these investments, the net asset value is calculated by dividing the total value of all the securities of the fund by the total number of shares of the fund in circulation. The NAV is generated daily for mutual funds. Total annual return is considered by a number of analysts to be a better and more accurate indicator of the performance of a mutual fund, but net asset value is still used as a practical interim valuation tool.
Since the book value per share only takes into account the book value, it does not take into account other intangible factors that may increase the market value of the shares of a company, even during liquidation. For example, banks or high-tech software companies often have very few tangible assets relative to their intellectual property and human capital (labor). These intangible assets would not always be taken into account in the calculation of the book value.