Loading the player...

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.

Formula for calculating book value per share.

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.

RELATED TERMS
  1. Book Value Per Common Share

    Book value per common share is a formula used to calculate the ...
  2. Shareholder Equity Ratio

    The shareholder equity ratio is used to help determine how much ...
  3. Book

    A book is a record of all the positions that a trader is holding, ...
  4. Asset Value Per Share

    Asset value per share is the total value of an investment or ...
  5. Shareholder Value

    Shareholder value is that delivered to equity owners of a corporation ...
  6. Stock

    A stock is a form of security that indicates the holder has a ...
Related Articles
  1. Investing

    Balance Sheet: Analyzing Owners' Equity

    Analyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
  2. Investing

    The Difference Between Enterprise Value and Equity Value

    Enterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
  3. Investing

    Using The Price-To-Book Ratio To Evaluate Companies

    The Price-To-Book (P/B) ratio can be an easy way to determine a company's value, but it isn't magic!
  4. Investing

    What Does Negative Shareholder Equity On A Balance Sheet Mean?

    Negative shareholder equity on a company’s balance sheet is a red flag that should prompt potential investors to take a closer look before committing their money.
  5. Investing

    Book Value Per Share for Banks: Is It a Good Measure? (WFC, BAC)

    Find out why bank stocks usually trade below book value and understand how trading activities increase banks' risk exposures and affect valuation.
  6. Investing

    Lowe's Stock: Capital Structure Analysis (LOW)

    Examine Lowe's Companies' equity capitalization, debt capitalization and enterprise value to analyze trends in the retailer's capital structure.
  7. Investing

    Know your shareholder rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company. Read on to learn what rights you have as a shareholder.
  8. Investing

    Investment Valuation Ratios

    Learn about per share data, price/book value ratio, price/cash flow ratio, price/earnings ratio, price/sales ratio, dividend yield and the enterprise multiple.
RELATED FAQS
  1. What is the difference between book value per common share and NAV (net asset value)?

    Understand the difference between book value per common share and net asset value, and learn how these evaluations are used ... Read Answer >>
  2. How Are Book Value and Intrinsic Value Different?

    Book value and intrinsic value are two ways to measure the value of a company. Find out which is known as the true value ... Read Answer >>
  3. What is the difference between book value and carrying value

    Dig deeper into the definitions of carrying value and book value, and learn to differentiate between their various financial ... Read Answer >>
  4. What are the components of shareholder equity?

    Understanding company valuation figures, such as shareholder equity, is crucial in assessing a business. Read Answer >>
  5. How Is Equity and Shareholders' Equity Different?

    A company's equity typically refers to the ownership of a public company. Shareholders' equity is the difference between ... Read Answer >>
  6. What is the difference between enterprise value and equity value?

    Valuating a business accurately depends heavily on the purpose of the valuation. Learn how enterprise value and equity value ... Read Answer >>
Trading Center