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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 book value of a company based on common shareholders’ equity in the company. The book value of a company is the difference between that company’s total assets and total liabilities, and not its share price in the market.
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 creditors are paid.
Watch more videos on the same topic : How to Determine the Book Value Per Share
Book value per share is total common equity divided by the # of common shares outstanding, where total common equity is equal to stockholders’ equity minus preferred equity.nnThe “book value” (common equity) is the accounting value of the firm (i.e., net assets). This is theoretically the amount that common shareholders would receive if all the assets were sold for their book values and the company’s debts were paid. It is also known as the equity value per sharennBook value per share is sometimes used to determine if a stock is undervalued. If a company’s market value is less than its book value, then value investors would say to buy the stock.n— nEdspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.n— nSUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: n• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTINGn• A 44-PAGE GUIDE TO U.S. TAXATIONn• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSISn• MANY MORE FREE PDF GUIDES AND SPREADSHEETSn* http://eepurl.com/dIaa5zn— nSUPPORT EDSPIRA ON PATREONn*https://www.patreon.com/prof_mclaughlinn— nGET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT n* https://edspira.thinkific.com n—n LISTEN TO THE SCHEME PODCAST n* Apple Podcasts: https://podcasts.apple.com/us/podcast/scheme/id1522352725 n* Spotify: https://open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc n* Website: https://www.edspira.com/podcast-2/ n— nGET TAX TIPS ON TIKTOK n* https://www.tiktok.com/@prof_mclaughlinn — nACCESS INDEX OF VIDEOS n* https://www.edspira.com/index n— nCONNECT WITH EDSPIRA n* Facebook: https://www.facebook.com/Edspira n* Instagram: https://www.instagram.com/edspiradotcom n* LinkedIn: https://www.linkedin.com/company/edspira n— nCONNECT WITH MICHAEL n* Twitter: https://www.twitter.com/Prof_McLaughlin n* LinkedIn: https://www.linkedin.com/in/prof-michael-mclaughlin n— nABOUT EDSPIRA AND ITS CREATOR n* https://www.edspira.com/about/n* https://michaelmclaughlin.com
- Book value per common share (BVPS) calculates the common stock per-share book value of a firm.
- 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.
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:
BVPS=TotalShareholderEquity−PreferredEquityTotalOutstandingSharesBVPS = fracTotal Shareholder Equity – Preferred EquityTotal Outstanding SharesBVPS=TotalOutstandingSharesTotalShareholderEquity−PreferredEquity
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,
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
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
The Difference Between Book Value per 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.
C This article has been edited from a previous version that incorrectly stated that debtors are paid after assets are liquidated. In fact, creditors are paid after assets are liquidated