That includes share blocks held by institutional investors and restricted shares. The company’s current stock price per share is divided by its book value per share (BVPS) to come up at this ratio. Book Value Per Share also theoretically reflects what shareholders would receive in a company liquidation after all its assets were sold and all of its liabilities paid. However, because assets would hypothetically sell at market value instead of historical asset values, this may not be an entirely accurate measurement. While BVPS considers the residual equity per-share for a company’s stock, net asset value, or NAV, is a per-share value calculated for a mutual fund or an exchange-traded fund, or ETF.

Book Value Per Common Share (BVPS): Definition and Calculation

If a P/B ratio is less than one, the shares are selling for less than the value of the company’s assets. This means that, in the worst-case scenario of bankruptcy, the company’s assets will be sold off and the investor will still make a profit. For example, a company has a P/B of one when the book valuation and market valuation are equal. The next day, the market price drops, so the P/B ratio becomes less than one. That means the market valuation is less than the book valuation, so the market might undervalue the stock. The following day, the market price zooms higher and creates a P/B ratio greater than one.

The Formula for Book Value Per Common Share Is:

• By repurchasing 1,000,000 common shares from the company’s shareholders, the BVPS increased from $3.00 to $4.50.
• Therefore, market value changes nearly always occur because of per-share price changes.
• This is especially applicable when the analyst has low visibility of the company’s future earnings prospects.
• For example, if the BVPS is greater than the MVPS, the company’s stock market may be undervaluing a company’s stock.
• By analyzing BVPS, investors can gain insights into a company’s financial health and intrinsic value, aiding in the assessment of whether a stock is over or undervalued.

Like other approaches, book value examines the equity holders’ portion of the profit pie. Unlike earnings or cash flow approaches, which are directly related to profitability, the book value method measures the value of the stockholders’ claim at a given point in time. An equity investor can deepen an investment thesis by adding the book value approach to his or her analytical toolbox.

The Difference Between Market Value per Share and Book Value per Share

Debt capital requires payment of interest, as well as eventual repayment of loans and bonds. Equity investors aim for dividend income or capital gains driven by increases in stock prices. 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.

How Can Companies Increase BVPS?

Even though book value per share isn’t perfect, it’s still a useful metric to keep in mind when you’re analyzing potential investments. In theory, a low price-to-book-value ratio means you have a cushion against poor performance. Outdated equipment may still add to book value, whereas appreciation in property may not be included. If you are going to invest based on book value, you have to find out the real state of those assets.

The market value of a company is based on the current stock market price and how many shares are outstanding. There are many methods that investors can use to evaluate the value of a company. By leveraging useful and insightful formulas such as a company’s Book Value Per Share, investors can determine a company’s value relative to its current market price. Assume that XYZ Manufacturing has a common equity balance of $10 million and 1 million shares of common stock are outstanding. This means that the BVPS is ($10 million / 1 million shares), or $10 per share. If XYZ can generate higher profits and use those profits to buy assets or reduce liabilities, the firm’s common equity increases.

The price per book value is a way of measuring the value offered by a firm’s shares. It is possible to get the price per book value by dividing the market price of a company’s shares by its book value per share. It implies that investors can recover more money if the company goes out of business.

While market cap represents the market perception of a company’s valuation, it may not necessarily represent the real picture. It is common to see even large-cap stocks moving 3 to 5 percent up or down during a day’s target cost versions in variance calculation session. Stocks often become overbought or oversold on a short-term basis, according to technical analysis. Mathematically, book value is the difference between a company’s total assets and total liabilities.

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. When the market value is near or less than the book value, the P/B ratio will be 1 or less, signaling that the stock may be undervalued. An undervalued stock can be a great bargain, particularly if company fundamentals are strong and the investor has a long timeline.