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). For instance, consider a company’s brand value, which is built through a series of marketing campaigns.

Methods to Increase the Book Value Per Share

One of the limitations of book value per share as a valuation method is that it is based on the book value, and it excludes other material factors that can affect the price of a company’s share. For example, intangible factors affect the value of a company’s shares and are left out when calculating the BVPS. The book value per share of a company is the total value of the company’s net assets divided by the number of shares that are outstanding. If a company has a book value per share that’s higher than its market value per share, it’s an undervalued stock. Undervalued stock that is trading well below its book value can be an attractive option for some investors. It depends on a number of factors, such as the company’s financial statements, competitive landscape, and management team.

How to Increase the Book Value Per Share

It also may not fully account for workers’ skills, human capital, and future profits and growth. The book value of a company is based on the amount of money that shareholders would get if liabilities were paid off and assets were liquidated. The market value of a company is based on the current stock market price and how many shares are outstanding. To calculate book value per share, simply divide a company’s total common equity by the number of shares outstanding. For example, if a company has total common equity of $1,000,000 and 1,000,000 shares outstanding, then its book value per share would be $1.

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. 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.

How Does BVPS Differ from Market Value Per 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. Book value per share (BVPS) tells investors the book value of a firm on a per-share basis. Investors use BVPS to gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. Book value refers to a firm’s net asset value (NAV) or its total assets minus its total liabilities.

Value investors use BVPS to identify stocks that are trading below their intrinsic value, indicating potential undervaluation. Conversely, if the market value per share exceeds BVPS, the stock might be perceived as overvalued. BVPS offers a baseline, especially valuable for value investors looking for opportunities in underpriced stocks. In other words, investors understand the company’s recent performance is underwhelming, but the potential for a long-term turnaround and the rock-bottom price can create a compelling margin of safety.

Even if a company has a high book value per share, there’s no guarantee that it will be a successful investment. This is why it’s so important to do a lot of research before making any investment decisions. Preferred stock is usually excluded from the calculation because preferred stockholders have a higher claim on assets in case of liquidation. A P/B ratio of 1.0 indicates that the market price of a share of stock is exactly equal to its book value. For value investors, this may signal a good buy since the market the direct write off method and its example price generally carries some premium over book value. BVPS is typically calculated and published periodically, such as quarterly or annually.

BVPS represents the accounting value of each share based on the company’s equity, while the market value per share is determined by the stock’s current trading price in the market. For companies seeking to increase their book value of equity per share (BVPS), profitable reinvestments can lead to more cash. In return, the accumulation of earnings could be used to reduce liabilities, which leads to higher book value of equity (and BVPS). Often called shareholders equity, the “book value of equity” is an accrual accounting-based metric prepared for bookkeeping purposes and recorded on the balance sheet. The Book Value Per Share (BVPS) is the per-share value of equity on an accrual accounting basis that belongs to the common shareholders of a company.

Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

What Is Book Value Per Common Share?

The company generates $500,000 in earnings and uses $200,000 of the profits to buy assets, its common equity increases along with BVPS. If XYZ uses $300,000 of its earnings to reduce liabilities, common equity also increases. Let’s say that Company A has $12 million in stockholders’ equity, $2 million of preferred stock, and an average of 2,500,000 shares outstanding. You can use the book value per share formula to help calculate the book value per share of the company. BVPS relies on the historical costs of assets rather than their current market values. This approach can lead to significant discrepancies between the book value and the actual market value of a company’s assets.

However, the market value per share—a forward-looking metric—accounts for a company’s future earning power. As a company’s potential profitability, or its expected growth rate, increases, the corresponding market value per share will also increase. A company can use a portion of its earnings to buy assets that would increase common equity along with BVPS.

1. Assume XYZ repurchases 200,000 shares of stock, and 800,000 shares remain outstanding.
2. Repurchasing 500,000 common stocks from the company’s shareholders increases the BVPS from $5 to $6.
3. Over time, the historical cost basis may not reflect the true worth of assets due to inflation, depreciation, and changes in market conditions, leading to potential misvaluation of the company’s stock.
4. The market value of a company is based on the current stock market price and how many shares are outstanding.
5. BVPS offers a baseline, especially valuable for value investors looking for opportunities in underpriced stocks.
6. The figure that represents book value is the sum of all of the line item amounts in the shareholders’ equity section on a company’s balance sheet.

The book value per share (BVPS) metric helps investors gauge whether a stock price is undervalued by comparing it to the firm’s market value per share. BVPS is what shareholders receive if the firm is liquidated, all tangible assets are sold, and all liabilities are paid. Book value per share (BVPS) measures the book value of a firm on a per-share basis. BVPS is found by dividing equity available to common shareholders by the number of outstanding shares. 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.

For example, if a company has a total asset balance of $40mm and liabilities of $25mm, then the book value of equity (BVE) is $15mm. As suggested by the name, the “book” value per share calculation begins with finding the necessary balance sheet data from the latest financial report (e.g. 10-K, 10-Q). This means that each share of the company would be worth $8 if the company got liquidated. Now, let’s say that you’re considering investing in either Company A or Company B. Given that Company B has clearing account a higher book value per share, you might find it tempting to invest in that company.

The book value per share (BVPS) ratio compares the equity held by common stockholders to the total number of outstanding shares. To put it simply, this calculates a company’s per-share total assets less total liabilities. Stock repurchases occur at current stock prices, which can result in a significant reduction in a company’s book value per common share. To get BVPS, you divide the figure for total common shareholders’ equity by the total number of outstanding common shares.

However, book value per share can be a useful metric to keep in mind when you’re analyzing potential investments. The ratio may not serve as a valid valuation basis when comparing companies from different sectors and industries because companies in other industries may record their assets differently. BVPS is more relevant for asset-heavy companies, such as manufacturing firms, where physical assets constitute a significant portion of the balance sheet. Yes, if a company’s liabilities exceed its assets, the BVPS can be negative, signaling potential financial distress. By multiplying the diluted share count of 1.4bn by the corresponding share price for the year, we can calculate the market capitalization for each year. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.