How is book value per share calculated
Book value per share is calculated by taking the total equity of a company and dividing the same by the outstanding shares.
BVPS calculation formula
BVPS helps to get hold of the intrinsic value of the company.
BVPS is a way to compare the value of equity available to common shareholders as per the share. It It is also utilized in determining whether the stock of a particular company is overvalued or undervalued in comparison with its market value.
If the BVPS is more significant than the market price, it means that the stock has a value less than its current price, hence attracting value-seeking investors.
As a measure of corporate financial strength, this measure shows the amount of money each shareholder would get per share if the company liquidated its assets.
Thus BVPS reflects the net asset value of the company on a per-share basis.
Importance of Book Value Per Share (BVPS)
BVPS is one of the vital financial metrics that are used by the investors in determination of financial health of a company along with that of valuation of its stock.
It can be calculated simply by adding the total equity of a company and then dividing it by outstanding shares. BVPS, as such actually reveals whether the stock is overvalued or undervalued.
If the BVPS turns out to be more than the current market value, then it may indicate that the stock is undervalued and that there could be an investment opportunity.
A good BVPS reflects the stable asset base and effective management of liabilities and equity as indicators of financial stability.
Companies with high BVPS in comparison to the stock price are usually considered investments with lower risk as they are supported by comprehensive tangible assets. Specifically, value-based, low-risk investment investors find it very useful.
BVPS plays a very important role in doing fundamental analysis and helps to present whether the intrinsic value of a company is reflected by its stock price.
Value investors particularly look at BVPS, which will help identify the stocks that are trading below their true worth.
When BVPS increases with time, it also means that the company is efficiently deploying retained earnings to enhance equity, showing great potential for long-term growth.
It also assists comparison within sectors. Investors can identify those companies that give better value in comparison to their stock price by studying the BVPS of the same-sector companies.
As it leads to a higher BVPS in comparison to the other industry, the company can also become more attractive to those investment analyzers focused upon asset value.
In times of distress, BVPS offers an approximation for liquidation value and therefore provides insight into the potential that shareholders may recover, if the company were to be liquidated. F
or example, during bankruptcy, this value will help determine the downside risk. Regular tracking of BVPS also helps determine the growth path of a company over time and whether such growth is sustainable and indicates successful management and profitable reinvestment policy.
Limitations of BVPS
One major disadvantage of using BVPS is the exclusion of intangible assets, such as patents, intellectual property, and brand value, all of which can be vital for the value of any company dealing with technology or pharmaceuticals;
however, BVPS does not capture their value, thus often causing an undervaluation of firms.
BVPS is also not of much use for those industries which have low assets, such as technology or software, wherein the value factor is more by intellectual capital and human resources than physical ones.
For such sectors, Earnings Per Share (EPS) or Price to Earnings (P/E) ratio is a better value indicator.
Accounting practices also have significant impact on the BVPS computation. This mainly deals much with depreciation and method of valuing assets.
For example, if a company employs the accelerated depreciation methods, then its book value in the financial statement will be less compared with the book value in the financial statement of a similar company that employs the straight-line method.
Such implication may therefore mislead investors over the actual worth of the company.
The other limitation is that BVPS would only reflect history costs and not the current value in the market place, further limiting its relevance in times of market fluctuation. T
his results in a set of figures no longer reflecting what the true asset values are, especially with companies having appreciating assets like real estate.
Another area where liabilities distort the BVPS is with a firm’s balance sheet. High debt balances reduce the BVPS and inaccurately portray the company’s value.
It also does not take into account prospects for future growth and profit, which makes the use of this measure less valuable for investors who focus on growth.
BVPS is often insignificant in high growth sectors like technology due to the fact that the revenues and market growth are of much importance than a heavy asset scale.
BVPS is distorted under inflationary conditions because historical cost values no longer reflect replacement costs in the present. Further, BVPS cannot show operational efficiency;
therefore, other performance measures such as Return on Equity (ROE) should be taken into account for a more comprehensive appraisal.