What Is Book Value of Equity Per Share – BVPS?
Book value of equity per share (BVPS) is the equity available to common shareholders divided by the number of outstanding shares. This represents the minimum value of a company's equity.
Since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred stock is subtracted from shareholders' equity to derive the equity available to common shareholders.
Shareholders’ equity is the owners’ residual claim in the company after debts have been paid. It is equal 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.
The Formula for BVPS Is
BVPS=Total shares outstandingTotal equity−Preferred equity
Book Value of Equity Per Share (BVPS)
What Does the Book Value of Equity Per Share Tell You?
The book value of equity per share (BVPS) metric can be used by investors to gauge whether a stock price is undervalued, by comparing it to the firm's market value per share. If a company’s BVPS is higher than its market value per share—its current stock price—then the stock is considered undervalued. If the firm's BVPS increases, the stock should be perceived as more valuable, and the stock price should increase.
In theory, BVPS is the sum that shareholders would receive in the event that the firm was liquidated, all of the tangible assets were sold and all of the liabilities were paid. However, as the assets would be sold at market prices, and book value uses the historical costs of assets, market value is considered a better floor price than book value for a company.
If a company's share price falls below its BVPS a corporate raider could make a risk-free profit by buying the company and liquidating it. If book value is negative, where a company's liabilities exceed its assets, this is known as a balance sheet insolvency.
- Book value of equity per share indicates a firm's net asset value (total assets - total liabilities) on a per-share basis.
- When a stock is undervalued, it will have a higher book value per share in relation to its current stock price in the market.
- The measure is used mainly by stock investors to evaluate a company's stock price.
Example of How to Use Book Value of Equity Per Share
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. Besides stock repurchases, a company can also increase BVPS by taking steps to increase the asset balance and reduce liabilities.
The Difference Between Market Value per Share and Book Value per Share
While BVPS is calculated using historical costs, the market value per share is a forward-looking metric that takes into account a company's future earning power. An increase in a company’s potential profitability or expected growth rate should increase the market value per share.
For example, a marketing campaign will reduce BVPS by increasing costs. However, if this builds brand value and the company is able to charge premium prices or its products, its stock price might rise far above its BVPS.