What is Book Value Per Common Share?
Book value per common share (or, simply book value per share - BVPS) is a method to calculate the per-share value of a company based on common shareholders' equity in the company. Should the company dissolve, the book value per common share indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.
Understanding Book Value
The Formula for Book Value Per Common Share Is
The book value per common share (formula below) is an accounting measure based on historical transactions:
What Does BVPS Tell You?
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 paid dividends. 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 reduction 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.
- Book value per common share calculates the per-share value of a company based on common shareholders' equity in the company.
- Since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred equity is subtracted from shareholder’s equity to derive the equity available to common shareholders.
- If a company’s BVPS is higher than its market value per share, then its stock may be considered to be undervalued.
Example of BVPS
As a hypothetical example, assume 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.
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 classify certain transactions.
For instance, consider a company's brand value, which is built through a 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 demand may increase the stock price, which results in 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 dividing the total value of all the fund's securities by the total number of outstanding fund shares. NAV is generated daily for mutual funds. Total annual return 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.
Limitations of BVPS
Because book value per share only considers the book value, it fails to incorporate other intangible factors that may increase the market value of a company's shares, even upon liquidation. For instance, banks or high-tech software companies often have very little tangible assets relative to their intellectual property and human capital (labor force). These intangibles would not always be factored in to a book value calculation.