Book Value: Definition, Meaning, Formula, and Examples

The figure that represents book value is the sum of all of the line item amounts in the shareholders’ equity section on a company’s balance sheet. As noted above, another way to calculate book value is to subtract a business’ total liabilities from its total assets. 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.

Book Value, Face Value & Market Value – Video Explanation

Investors use BVPS to gauge whether a stock is trading below or above its intrinsic value.

There are a number of other factors that you need to take into account when considering an investment. For example, the company’s financial statements, competitive landscape, and management team. You also need to make sure that you have a clear understanding of the risks involved with any potential investment. 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. Yes, if a company’s liabilities exceed its assets, the BVPS can be negative, signaling potential financial distress. 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.

Book Value: Definition, Meaning, Formula, and Examples

Book value per common share (or, simply book value per share – BVPS) is a method to calculate the per-share book value of a company based on common shareholders’ equity in the company. 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. The book value per share and the market value per share are some of the tools used to evaluate the value of a company’s stocks. The market value per share represents the current price of a company’s shares, and it is the price that investors are willing to pay for common stocks. The market value is forward-looking and considers a company’s earning ability in future periods. As the company’s expected growth and profitability increase, the market value per share is expected to increase further.

1. The market value per share is a company’s current stock price, and it reflects a value that market participants are willing to pay for its common share.
2. Market demand may increase the stock price, which results in a large divergence between the market and book values per share.
3. BVPS is the book value of the company divided by the corporation’s issued and outstanding common shares.
4. In the example from a moment ago, a company has $1,000,000 in equity and 1,000,000 shares outstanding.
5. One of the limitations of book value per share as a valuation method is that it is based on the book value, and it excludes other material factors that can affect the price of a company’s share.

How often is BVPS calculated?

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. BVPS is typically calculated and published periodically, such as quarterly or annually. This infrequency means that BVPS may not always reflect the most up-to-date value of a company’s assets and liabilities. If the company is going through a period of cyclical losses, it may not have positive trailing earnings or operating cash flows.

In the food chain of corporate security investors, equity investors do not have the first crack at operating profits. Common shareholders get whatever is left over after the corporation pays its creditors, preferred shareholders and the tax man. But in the world of investing, being last in line can often be the best place to be, and the common shareholder’s lot can be the biggest piece of the profit pie. A good book value per share varies by industry, but generally, a higher value indicates a company’s assets exceed liabilities, suggesting a potentially stronger financial position. Comparing it to the stock price helps determine if a stock is trading at a reasonable value.

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business. The following image shows Coca-Cola’s “Equity Attributable to Shareowners” line at the bottom of its Shareowners’ Equity section. It’s one metric that an investor may look for if they’re software for accountants and bookkeepers interested in valuating Coca-Cola as a potential investment.

How does BVPS differ from market value per share?

Repurchasing 500,000 common stocks from the company’s shareholders increases the BVPS from $5 to $6. If a company’s BVPS is higher than its market value per share (the current stock price), the stock may be considered undervalued. This situation suggests a potential buying opportunity, as the market may be undervaluing the company’s actual worth. 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.

If book value is negative, where a company’s liabilities exceed its assets, this is known as a balance sheet insolvency. There are other factors that you need to take into consideration before making an investment. However, book value per share can be a useful metric to keep in mind when you’re analyzing potential investments. Value investors look for relatively low book values (using metrics bearer bonds meaning like P/B ratio or BVPS) but otherwise strong fundamentals in their quest to find undervalued companies.