What is book value per share (BVPS)?
Key takeaways
Book value per share, or BVPS, provides the net asset value per share of a company.
BVPS may help investors understand whether stocks are over- or undervalued, and it could provide an estimate of what the shareholders may receive if the company was liquidated.
While BVPS may be one tool to help illustrate a company’s financial health, investors may find it helpful to understand its potential limitations as well.
Understanding book value per share
The definition of BVPS
Book value per share, or BVPS, indicates a company’s net asset value per share of its stock.
What it represents for investors
Calculating a company’s BVPS may help indicate to investors whether a company’s stock is over- or undervalued. It can also help illustrate the amount a company’s shareholders might be paid if the company’s liabilities were satisfied, its assets were sold, and the company was liquidated.
While BVPS may help indicate a company’s financial health, investors looking to grow their personal savings may want to explore certificates of deposit (CDs) or other high-yield savings products. The Raisin platform lets investors compare competitive rates to find options that suit their financial goals.
The book value per share formula
How to calculate BVPS
(Total equity – preferred equity) / total shares = BVPS
Breaking down the components
Total equity refers to the total shareholder equity in a company and is generally calculated by subtracting a company’s liabilities from its assets.
Preferred equity refers to the shares owned by preferred shareholders. Preferred equity is removed in the formula above so that investors may gain insight into what equity is available to common rather than preferred shareholders.
Total shares outstanding refers to the shares owned by shareholders.
A practical example
As an example, suppose a company’s total equity is $5 million, its preferred stocks total $1 million, and its total outstanding shares number 2 million. The calculation may look something like this:
($5,000,000 total equity - $1,000,000 preferred equity) / 2,000,000 total shares = $2 BVPS
Why BVPS matters for savers and investors
Identifying undervalued stocks
Investors may use BVPS as one tool to help identify potentially undervalued stocks. Generally, if the BVPS is higher than the market price per share, an investor may consider whether the stock is undervalued.
Assessing financial health
A company’s “floor” value generally refers to the minimum dollars likely to be brought in if the company were liquidated. Calculating a company’s BVPS may help investors identify the floor value of a company based on the company’s current financial data. That floor or minimum value can potentially provide an overview of a company’s overall financial health.
Industry limitations
BVPS may provide a more accurate financial picture for companies that are asset heavy, such as banking or manufacturing companies, because they tend to have assets that can often be readily calculated or valued. BVPS may not be as accurate for companies that rely on less concrete assets, like technology firms.
Factors that can change BVPS
Share buybacks
A company may increase its BVPS by purchasing common stock back from its shareholders. This typically has the effect of lowering the total outstanding shares in the BVPS calculation.
Increasing assets or reducing debt
Sometimes, a company may choose to buy more assets or pay down more of its debt. Either option, or a combination of each approach, would generally drive up the company’s equity numbers and likely increase its BVPS as well.
Retained earnings
A company may also choose to retain its earnings and reinvest its profits back into the company in a variety of ways, including directing the profits toward growing the company or enhancing its reserves. Retained earnings typically increase a company’s equity, which may increase the BVPS.
Limitations of using BVPS
Reliance on historical cost
Calculating BVPS generally involves using historical costs rather than current market prices. For instance, assets may gain or lose value, and using historical numbers may not always reflect updated values.
Exclusion of intangibles
BVPS calculations generally do not include intangible assets, such as the value of a company’s brand or its patents. These components may not have a readily assigned value, so they typically are not reflected in the BVPS calculations for a company.
Bottom line
Calculating a company’s BVPS may help investors begin to understand a company’s overall financial health, including what the company may bring in if it were liquidated. BVPS generally is one tool for investors to use in determining whether a stock is under- or overvalued, but it also may have some limitations for investors to consider.
While Raisin doesn’t offer stock trading, it can help investors build out portions of a healthy financial portfolio. Savers can use its marketplace to compare rates and features across multiple high-yield savings products and certificates of deposit (CDs) to find options for their needs.
Frequently asked questions
Can a company have a negative BVPS?
If a company’s debts are greater than its assets, its equity will likely be negative. That may have the effect of a negative BVPS calculation.
Is a high BVPS always better?
A high BVPS may not always be better, and other variables may factor in when considering a company’s financial health.
Does BVPS include intangible assets like brand value?
Generally speaking, BVPS typically does not include intangible assets like brand value.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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