Admittedly, the two terms sound similar. Book value per common share, also known as book value per equity of share or BVPS, is used to evaluate the stock price of an individual company, whereas net asset value, or NAV, is used as a measure for evaluating all of the equity holdings in a mutual fund or exchange traded fund (ETF).
- Book value per common share calculates the per-share value of a company based on common shareholders' equity in the company (it doesn't include preferred shares).
- Net asset value is the total value of an entity's—usually a fund's—assets minus its liabilities; it's a way to evaluate the total worth of the fund's holdings.
The Basics of Book Value Per Common Share
Book value per common share is an equity evaluation measure investors and analysts use to assess a conservative value of a company’s common stock. The value generated from the formula for this per share evaluation shows the original value of the company’s stock, adjusted for outflows of dividends and stock buybacks and inflows of earnings modifiers, compared to total current outstanding shares. Book value per common share is calculated as follows:
BVPS=number of shares outstandingvalue of common equity
Note that preferred stock is not included in the BVPS calculation. BVPS can be an important metric that helps investors determine if a stock is undervalued. However, BVPS gives only a narrow picture of the company’s overall current situation. It doesn't factor in future prospects; it also fails to incorporate other intangible factors, such as intellectual property or human capital. So, by itself, it is an insufficient single indicator of a stock's potential rise in value.
If a company’s BVPS is higher than its market value per share, then its stock may be considered to be undervalued.
The Basics of Net Asset Value
Net asset value, or NAV, is a per-share value calculated for a mutual fund, an exchange-traded fund (ETF), or a closed-end fund. For any of these investments, the NAV is calculated by dividing the total value of all the fund's securities by the total number of outstanding fund shares. The formula for NAV is written as follows:
- NAV = (Assets - Liabilities) / Total number of outstanding shares
NAV is generated daily for funds. The total annual return (the geometric average amount of money earned by an investment each year) is considered by a number of analysts to be a better, more accurate gauge of a mutual fund's performance, but the NAV is still used as a handy interim evaluation tool. NAV calculations are also used to evaluate real estate investment trusts, or REITs, although the precise value of REIT holdings can be difficult to determine.
Because ETFs and closed-end funds trade like stocks on exchanges, their shares trade at a market value that can be a few dollars/cents above (trading at a premium) or below (trading at a discount) the actual NAV. This allows for profitable trading opportunities to active ETF traders who can spot and encash on such opportunities in time.
Similar to mutual funds, ETFs also calculate their NAV daily at the close of the market for reporting purposes. Additionally, they also calculate and disseminate intra-day NAV multiple times per minute in real time.