Book Value Per Share (BVPS)
What Is Book Value Per Share (BVPS)?
Book value per share (BVPS) is the ratio of equity available to common shareholders partitioned by the number of outstanding shares. This figure addresses the base value of a company's equity and measures the book value of a firm on a per-share basis.
Understanding Book Value Per Share (BVPS)
The book value per share (BVPS) metric can be utilized by investors to check whether a stock price is undervalued by contrasting it with the firm's market value per share. In the event that a company's BVPS is higher than its market value per share — its current stock price — then, at that point, the stock is viewed as undervalued. On the off chance that the firm's BVPS increases, the stock ought to be perceived as more valuable, and the stock price ought to increase.
In theory, BVPS is the sum that shareholders would receive if the firm was liquidated, the substantial assets were all sold and the liabilities were all paid. Notwithstanding, as the assets would be sold at market prices, and book value utilizes the historical costs of assets, market value is viewed as a better floor price than book value for a company.
On the off chance that a company's share price falls below its BVPS, a corporate raider could create a risk-free gain by buying the company and liquidating it. In the event that book value is negative, where a company's liabilities surpass its assets, this is known as a balance sheet insolvency.
The formula for BVPS is:
Shareholders' equity is the proprietors' residual claim in the company after obligations have been paid. It is equivalent to a firm's total assets minus its total liabilities, which is the net asset value or book value of the company as a whole.
Since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred stock is deducted from shareholders' equity to infer the equity available to common shareholders.
Illustration of Book Value Per Share
Assume, for instance, that XYZ Manufacturing's common equity balance is $10 million, and that 1 million shares of common stock are outstanding. This means that the BVPS is ($10 million/1 million shares), or $10 per share. On the off chance that XYZ can generate higher profits and utilize those profits to buy more assets or reduce liabilities, the firm's common equity increases.
If, for instance, the company generates $500,000 in earnings and utilizations $200,000 of the profits to buy assets, common equity increases alongside BVPS. In the event that XYZ utilizes $300,000 of its earnings to reduce liabilities, common equity additionally increases.
One more method for expanding BVPS is to repurchase common stock from shareholders. Many companies use earnings to buy back shares. Utilizing the XYZ model, assume that the firm repurchases 200,000 shares of stock and that 800,000 shares stay outstanding. Assuming common equity is $10 million, BVPS increases to $12.50 per share. Other than stock repurchases, a company can likewise increase BVPS by doing whatever it takes to increase the asset balance and reduce liabilities.
Market Value Per Share versus Book Value Per Share
While BVPS is calculated utilizing historical costs, the market value per share is a forward-looking metric that considers a company's future earning power. An increase in a company's likely profitability or expected growth rate ought to increase the market value per share.
For instance, a marketing campaign will reduce BVPS by inflating costs. Be that as it may, assuming this forms brand value and the company can charge premium prices for its products, its stock price could rise far over its BVPS.
- BVPS is utilized fundamentally by stock investors to assess a company's stock price.
- Book value per share (BVPS) takes the ratio of a firm's common equity partitioned by its number of shares outstanding.
- Book value of equity per share successfully shows a firm's net asset value (total assets - total liabilities) on a per-share basis.
- At the point when a stock is undervalued, it will have a higher book value per share comparable to its current stock price in the market.
How Might Companies Increase BVPS?
A company can utilize a portion of its earnings to buy assets that would increase common equity alongside BVPS. Or on the other hand, it could utilize its earnings to reduce liabilities, which would likewise bring about an increase in its common equity and BVPS. One more method for expanding BVPS is to repurchase common stock from shareholders and many companies use earnings to buy back shares.
How Does BVPS Differ from Market Value Per Share?
While BVPS is calculated utilizing historical costs, the market value per share is a forward-looking metric that considers a company's future earning power. An increase in a company's likely profitability or expected growth rate ought to increase the market value per share. Basically, the market price per share is the current price of a single share in a publicly traded stock. Dissimilar to BVPS, market price per share isn't fixed as it varies dependent exclusively upon market powers of supply and demand.
What Does Book Value Per Share (BVPS) Tell You?
In theory, BVPS is the sum that shareholders would receive if the firm was liquidated, the unmistakable assets were all sold and the liabilities were all paid. In any case, its value lies in the way that investors use it to measure whether a stock price is undervalued by contrasting it with the firm's market value per share. On the off chance that a company's BVPS is higher than its market value per share, which is its current stock price, then the stock is thought of as undervalued.