What is Book Value Of Equity Per Share - BVPS
Book value of equity per share (BVPS), which is the equity available to common shareholders divided by the number of outstanding shares, is the minimum value of a company's equity. Because preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred stock is subtracted from shareholder’s equity to derive the equity available to common shareholders.
Shareholders’ equity is the owners’ residual claim after debts have been paid, and is equal to a firm's total assets minus its total liabilities, which is the net asset value or book value of a company.
Book Value of Equity Per Share (BVPS)
BREAKING DOWN Book Value Of Equity Per Share - BVPS
Book value of equity per share (BVPS) can be used by investors to gauge whether a stock price is undervalued, by comparing it to 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 clearly undervalued. If 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, and all the tangible assets were sold and 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, because if the share price falls below BVPS a corporate raider could make a risk free profit by buying the company and liquidating it. If book value is negative — a company's liabilities exceed its assets –—this is known as a balance sheet insolvency.
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.
How Companies Can 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. Besides stock repurchases, a company can also increase BVPS by taking steps to increase the asset balance and reduce liabilities.