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Book Value Per Common Share - BVPS

Book Value Per Common Share - BVPS

What is Book Value Per Common Share?

Book value per common share (or, essentially book value per share - BVPS) is a method to work out the per-share book value of a company in light of 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.

Should the company break up, the book value per common share demonstrates the dollar value staying for common shareholders after all assets are liquidated and all debt holders are paid.

The Formula for Book Value Per Common Share Is:

The book value per common share (formula below) is an accounting measure in light of historical transactions:
BVPS=Total Shareholder EquityPreferred EquityTotal Outstanding SharesBVPS = \frac{Total \ Shareholder \ Equity - Preferred \ Equity}{Total \ Outstanding \ Shares}

What Does BVPS Tell You?

The book value of common equity in the numerator mirrors the original proceeds a company gets from giving common equity, increased by earnings or diminished by losses, and diminished by paid dividends. A company's stock buybacks decline the book value and total common share count. Stock repurchases happen at current stock prices, which can bring about a huge reduction in a company's book value per common share. The common share count utilized in the denominator is ordinarily an average number of diluted common shares for the last year, which considers any extra shares past the fundamental share count that can start from stock options, warrants, preferred shares, and other convertible instruments.

Illustration of BVPS

As a speculative model, expect that XYZ Manufacturing's common equity balance is $10 million, and that 1 million shares of common stock are outstanding, and that means that the BVPS is ($10 million/1 million shares), or $10 per share. On the off chance that XYZ can produce higher profits and utilize those profits to buy more assets or reduce liabilities, the firm's common equity increases. If, for instance, the company produces $500,000 in earnings and utilizations $200,000 of the profits to buy assets, common equity increases alongside BVPS. Then again, assuming XYZ utilizes $300,000 of the earnings to reduce liabilities, common equity additionally increases.

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

The market value per share is a company's current stock price, and it mirrors a value that market participants will pay for its common share. The book value per share is calculated utilizing historical costs, yet the market value per share is a forward-looking metric that considers a company's earning power from here on out. With increases in a company's estimated profitability, expected growth, and safety of its business, the market value per share becomes higher. Huge differences between the book value per share and the market value per share emerge due to the manners by which accounting principles characterize certain transactions.

For example, consider a company's brand value, which is worked through a series of marketing efforts. U.S. generally accepted accounting principles (GAAP) require marketing costs to be discounted right away, decreasing the book value per share. Be that as it may, assuming advertising efforts improve the picture of a company's products, the company can charge premium prices and make brand value. Market demand might increase the stock price, which brings about a large divergence between the market and book values per share.

The Difference Between Book Value per Common Share and Net Asset Value (NAV)

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. For any of these investments, the NAV is calculated by separating the total value of the relative multitude of fund's securities by the total number of outstanding fund shares. NAV is produced daily for mutual funds. Total annual return is viewed as by a number of analysts to be a better, more accurate check of a mutual fund's performance, however the NAV is as yet utilized as a convenient interim evaluation device.

Limitations of BVPS

Since book value per share just considers the book value, it neglects to integrate other elusive factors that might increase the market value of a company's shares, even upon liquidation. For example, banks or cutting edge software companies frequently have next to no substantial assets relative to their intellectual property and human capital (labor force). These intangibles wouldn't necessarily in all cases be figured in to a book value calculation.

Features

  • In the event that a company's BVPS is higher than its market value per share, its stock might be viewed as undervalued.
  • Since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred equity is deducted from shareholder's equity to infer the equity accessible to common shareholders.
  • Book value per common share (BVPS) works out the common stock per-share book value of a firm.