What is the Book Value Per Share?
Book Value Per Share (BVPS) refers to the per-share value of equity on an accrual accounting basis that belongs to the common shareholders of a company.
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The book value of equity is defined as the value of a company’s assets as if all of its assets were liquidated to pay off its liabilities. The amount of cash remaining once all outstanding liabilities are paid off is captured by the book value of equity.
Often called shareholder’s equity, the “book value of equity” is an accrual accounting-based profit measure.
The formula for BVPS involves taking the book value of equity and dividing that figure by the weighted average of shares outstanding.
- Book Value Per Share = (Shareholders’ Equity – Preferred Equity) / Weighted Average of Common Shares Outstanding
If relevant, the value of preferred equity claims should also be subtracted out from the numerator, the book value of equity.
For example, if a company has a total asset balance of $40mm and total liabilities of $25mm, then the book value of equity is $15mm.
If we assume the company has preferred equity of $3mm and a weighted average share count of 4mm, the BVPS is $3.00 (calculated as $15mm less $3mm, divided by 4mm shares).
The difference between book value per share and the market share price is as follows.
- Book Value Per Share (BVPS): The book value of equity per share reflects the equity value recorded on the balance sheet. Unlike the market share price, the BVPS is a historical measure intended for purposes of accrual accounting.
- Market Share Price: The market share price factors in existing investor sentiment regarding future growth and profits (and is forward-looking). In nearly all cases, the market price is much greater than the book value of equity per share. The market share price reflects the most recent prices that investors paid for each share.
Although infrequent, many value investors will see a book value of equity per share below the market share price as a “buy” signal. But an important point to understand is that these investors view this simply as a sign that the company is potentially undervalued, not that the fundamentals of the company are necessarily strong.
In other words, the 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.
Nevertheless, most companies with expectations to grow and produce profits in the future will have a book value of equity per share lower than their current publicly traded market share price.
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 results in a higher book value of equity (and BVPS).
Alternatively, another method to increase the BVPS is via share repurchases (i.e. buybacks) from existing shareholders.
We’ll now move to a modeling exercise, which you can access by filling out the form below.
In our example scenario, the company we’ll be calculating the book value of equity per share with the following financial data:
With those three assumptions given, we can calculate the book value of equity as $1.6bn.
The next assumption states that the weighted average of common shares outstanding is 1.4bn.
Using those two assumptions, we can calculate the Year 1 BVPS as $1.14.
- BVPS = $1.6bn / 1.4bn = $1.14
As for the next projection period, Year 2, we’ll simply extend each operating assumption from Year 1, and thereby, the BVPS is going to be $1.14 once again.
The difference lies in the change in the market share price. We’ll assume the trading price in Year 0 was $20.00, and in Year 2, that the market share price increases to $26.00, which comes out to be a 30.0% year-over-year increase.
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.
- Year 1 = $28.0bn
- Year 2 = $36.4bn
Despite the increase in share price (and market capitalization), the book value of equity per share remained unchanged.
Unless the company has updated certain assets and liabilities items on its balance sheet to their (usually higher) fair market values (FMVs), the book value of equity will NOT reflect the true picture.
Clear differences between the book value and market value of equity can take place, which occurs more often than not for the vast majority of companies.