What is 'Book Value Of Equity Per Share - BVPS'
Book value of equity per share (BVPS) is a ratio that divides common equity value by the number of common stock shares outstanding. The book value of equity per share is one factor that investors can use to determine whether a stock price is undervalued. If a business can increase its BVPS, investors may view the stock as more valuable, and the stock price increases.
BREAKING DOWN 'Book Value Of Equity Per Share - BVPS'Common equity (or common stock equity) is defined using the balance sheet formula, which is (assets – liabilities = equity). Common equity refers to the equity section of the balance sheet less preferred stock equity. The equity section of the balance sheet includes common stock and preferred stock. If the company generates earnings, preferred stockholders receive dividend payments before common shareholders. Equity from preferred stock is excluded from the BVPS calculation.
How Companies Increase BVPS
Assume, for example, that XYZ Manufacturing’s common equity balance is $10 million, and that 1 million shares of common stock are outstanding, which 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 more assets or reduce liabilities, the firm's common equity increases. If, for example, the company generates $500,000 in earnings and uses $200,000 of the profits to buy assets, common equity increases along with BVPS. On the other hand, if XYZ uses $300,000 of the earnings to reduce liabilities, common equity also increases.
Factoring in Common Stock Repurchases
Another way to increase BVPS is to repurchase common stock from shareholders. Many companies use earnings to buy back shares. Using the XYZ example, assume that the firm repurchases 200,000 shares of stock, and that 800,000 shares remain outstanding. If common equity is $10 million, BVPS increases to $12.50 per share. A firm that repurchases shares can also take steps to increase the asset balance and reduce liabilities.
Examples of Other Important Ratios
BVPS is one of several important ratios to assess the value of a company. The price-to-earnings (P/E) ratio, for example, is defined as the (market price of the stock) / (earnings per common stock share). This ratio calculates how much an investor is paying for each dollar of common stock earnings; a lower P/E ratio makes the stock price more attractive. If XYZ Manufacturing's market price is $60 per share and the firm earns $3 per common stock share, the P/E ratio is ($60 / $3), or 20.
Financial analysts also use the debt-to-equity (D/E) ratio, which is defined as (total liabilities) / (stockholder’s equity). Analysts monitor this ratio to determine whether a company is carrying too much debt.