Book value is the net asset value of a firm, the difference between the firm’s assets and liabilities. When the net asset value is expressed on a per-share basis, it becomes book value per share. Net asset value is also known as shareholders’ equity. Book value per share (BVPS) indicates the accounting value of each share of any listed company.
Book value per share computation
- Things to note:
Before computing the book value per share, you must be aware of a few things:
- Only tangible, quantifiable assets are included in the book value calculation
- Accumulated depreciation is deducted from the total asset value
- All intangible assets like goodwill, patent, etc., are not considered while computing book value
- Preferred stocks are deducted from the shareholders’ equity as preferred shareholders have priority claims on the company’s dividends and assets
- Compute net asset value
Net asset = (Total assets) – (Intangible assets + Liabilities)
For instance, a firm has total assets (i.e., tangible and intangible, both) worth Rs. 3 crores. Out of which, intangible assets are worth Rs. 25 lakh and liabilities are worth Rs. 50 lakh. The firm’s net asset value is Rs. 2.25 crore.
- Calculate book value per share
According to the book value per share formula,
Book value per share = Net asset value / Number of outstanding shares
Book value per share = Total shareholder’s equity / Number of outstanding shares
If a firm has preferred stock, the modified book value per share formula will be:
Book value per share = Shareholders’ equity – Preferred stock / Number of outstanding common stocks
Considering the example given in the earlier section, if the firm has preferred stock worth Rs. 25 lakh, the modified book value will be Rs. 2 crore. Now, if the firm has 20 lakh outstanding common shares, the firm’s book value per share will be Rs. 10.
Importance of book value per share
- BVPS is primarily used for calculating the price-to-book or the P/B ratio. It is the ratio of the company’s current market price per share to its book value. If the P/B ratio is below 1, it implies that the firm’s stocks are undervalued
- BVPS is a conservative approach that investors use to determine and measure the real value of a company’s stocks in the event of liquidation (after paying off all debts)
- The P/B ratio enables investors to assess the strength of a firm’s potential value when there is instability in future growth and projected earnings
BVPS as a metric for investments
Usually, capital-intensive industries and banks have a high book value per share. However, book value may not be an accurate metric for assessing labor-intensive firms or technology companies where most of their assets consist of copyrights, trademarks, IP, etc., as BVPS does not consider the value of intangible assets in its calculation.
Thus, factoring in only BVPS while taking stock investment decisions might not be a wise call on your part. Smart investment decisions need to take into consideration various parameters to determine the performance of a share and that company’s financial health over time.
If observing trends, ascertaining values and analyzing financial statements seem too tricky to deal with, there are smarter choices available that can make your investment decisions easier and simpler. One such smart choice is to get in touch with a financial expert who can curate plans that are unique to your financial goals, investment horizon and risk appetite in stock market investment space.