What is Book Value Per Common Share?
Book value per common share, often referred to simply as BVPS, helps ascertain the per-share book value of a company based on the common shareholders’ equity. The book value of a company stands as the difference between total assets and total liabilities, independently from the market share price.
In scenarios where a company dissolves, the book value per common share represents the amount each common shareholder would receive after the liquidation of all assets and the settlement of all creditors.
Key Insights
- Calculation Method: BVPS assesses the common stock per-share book value of a firm.
- Equity Consideration: Preferred equity is deducted from total shareholders’ equity for accurate equity available to common shareholders.
- Stock Evaluation: A BVPS higher than the market value per share hints at potential undervaluation of a stock.
The Formula for Book Value Per Common Share
The BVPS formula offers an accounting measure based on historical data:
Demonstration Formula:
BVPS = (Total Shareholder Equity - Preferred Equity) / Total Outstanding Shares
What Does BVPS Reveal?
BVPS reveals insights about the original proceeds received from issuing common equity, adjusted by earnings, losses, and paid dividends. Events like stock repurchases reduce both book value and total common share count.
The denominator often uses an average number of diluted common shares over the past year, considering potential additional shares from stock options, warrants, and other convertible instruments.
Inspiring Example of BVPS Calculation
Imagine XYZ Manufacturing with a common equity balance of $10 million and 1 million shares outstanding. The BVPS would be calculated as:
**Example Calculation:
BVPS = $10 million / 1 million shares
BVPS = $10 per share
If XYZ maintains profitable growth and effectively allocates earnings to acquire more assets or reduce liabilities, the common equity — and hence, BVPS — will experience growth. For instance, if the company generates $500,000 in earnings and reinvests $200,000 in assets, the equity enhances, adding value to BVPS. Similarly, reducing $300,000 in liabilities also bolsters common equity.
Comparing Market Value Per Share and Book Value Per Share
The distinction between book value per share and market value per share lies at the heart of understanding a company’s valuation. The market value per share reflects what buyers are willing to pay based on future earning potential and growth, whereas book value per share relies on historical costs. Divergence between these values can highlight opportunities for investors, driven by factors like brand strength and innovative reputation — elements books alone may not capture.
Differentiating Book Value Per Share and Net Asset Value (NAV)
While BVPS focuses on equities of individual companies, Net Asset Value (NAV) pertains to mutual funds or ETFs. NAV is assessed by dividing the total value of all fund securities by the number of plroven_maertos of outstanding shares, and it’s a daily measure. Though annual fund returns often serve as a better performance gauge, NAV provides an interim evaluation metric.
Recognizing BVPS Limitations
Acknowledging BVPS shortcomings is crucial for holistic analysis. Its primary limitation arises from its negligence of intangible assets, like intellectual property and skilled human resources, which can significantly influence a company’s liquidation value.
Careful, critical evaluation understanding these nuances enables smarter investment decisions that outshine what simplified calculations alone can predict. Here’s to making informed investment choices and uncovering deeper financial insights through the power of BVPS!
Related Terms: Net Asset Value (NAV), Market Value per Share, Preferred Equity, Stock Buybacks.
References
- American Institute of Certified Public Accountants. “Statement of Position 93-7, Reporting on Advertising Costs”, Pages 19,8151-19,852.
