Book Value Per Common Share

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What is 'Book Value Per Common Share'

Book value per common share is a measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly.

Formula:

Book Value Per Common Share

Should the company decide to dissolve, the book value per common indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.

In simple terms it would be the amount of money that a holder of a common share would get if a company were to liquidate.

BREAKING DOWN 'Book Value Per Common Share'

The book value per common share is an accounting measure based on historical transactions. The book value of common equity in the numerator reflects the original proceeds a company receives from issuing common equity, increased by earnings or decreased by losses, and decreased by dividends paid out. A company's stock buybacks decrease the book value and total common share count. Stock repurchases occur at current stock prices, which can result in a significant reductions in a company's book value per common share. The common share count used in the denominator is typically an average number of diluted common shares for the last year, which takes into account any additional shares beyond the basic share count that can originate from stock options, warrants, preferred shares and other convertible instruments.

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 reflects a value that market participants are willing to pay for its common share. The book value per share is calculated using historical costs, but the market value per share is a forward-looking metric that takes into account a company's earning power in the future. With increases in a company's estimated profitability, expected growth and safety of its business, the market value per share grows higher. Significant differences between the book value per share and the market value per share arise due to the ways in which accounting principles look upon certain transactions.

For example, consider a company's brand value, which is built through a long series of marketing campaigns. U.S. generally accepted accounting principles (GAAP) require marketing costs to be expensed immediately, reducing the book value per share. However, if advertising efforts enhance the image of a company's products, the company can charge premium prices and create brand value. Market participants may send the stock price higher, resulting in a large divergence between the market and book values per share.