What is Book Value Per Share (BVPS)?
The book value per share (BVPS) is the ratio of the equity available to ordinary shareholders divided by the number of shares outstanding. This number represents the minimum equity value of a company and measures the book value of a company based on one share.
The central theses
- The book value per share (BVPS) is the ratio of a company’s share capital divided by the number of shares outstanding.
- The book value of equity per share is effectively the net asset value of a company (total assets – total liabilities) on the basis of one share.
- When a stock is undervalued, it has a higher book value per share relative to its current share price in the market.
- BVPS is primarily used by stock investors to evaluate a company’s stock price.
Book value of equity per share (BVPS)
Understand Book Value Per Share (BVPS)
The Book Value Per Share (BVPS) metric can be used by investors to determine if a stock price is undervalued by comparing it to the company’s market value per share. When a company’s BVPS is higher than its market value per share – its current share price – the stock is considered undervalued. If the company’s BVPS goes up, the stock should be perceived as more valuable and the stock price should go up.
In theory, BVPS is the amount shareholders would receive if the company were liquidated, all property, plant and equipment were sold, and all liabilities were paid. However, because the assets would be sold at market prices and the book value uses the historical cost of the assets, market value is considered a better reserve price than book value for a company.
If a company’s stock price falls below its BVPS, a corporate raider could make a risk-free profit by buying the company and liquidating it. A negative book value, at which the liabilities of a company exceed its assets, is called balance sheet insolvency.
The formula for BVPS is:
B.VP.S. = Total number of shares outstandingTotal capital – Preference shares
Since preference shareholders have a higher claim to assets and earnings than ordinary shareholders, the preference shares are deducted from equity in order to derive the equity available to the ordinary shareholders.
The equity is the remaining claim of the owners in the company after the debt has been repaid. It is equal to the total assets of a company minus its total liabilities, which is the net asset value or book value of the company as a whole.
Assume that XYZ Manufacturing’s share capital is $ 10 million and there are 1 million common shares outstanding, which means the BVPS is ($ 10 million / 1 million shares) or $ 10 per share. If XYZ can make higher profits and use those profits to buy more assets or reduce liabilities, the company’s share capital will increase.
For example, if the company makes $ 500,000 in profits and uses $ 200,000 of the profit to purchase assets, the share capital will increase along with the BVPS. On the flip side, when XYZ uses $ 300,000 of profits to reduce liabilities, its share capital also increases.
Another way to increase the BVPS is to buy back common shares from shareholders. Many companies use profits to buy back shares. In the XYZ example, suppose the company is buying back 200,000 shares and there are 800,000 shares outstanding. With share capital of $ 10 million, the BVPS increases to $ 12.50 per share. In addition to share buybacks, a company can also increase BVPS by taking measures to increase the surplus and reduce liabilities.
Market value per share vs. book value per share
While BVPS is calculated using historical costs, the market value per share is a forward-looking metric that takes into account a company’s future earnings power. An increase in a company’s potential profitability or expected rate of growth should increase its market value per share.
For example, a marketing campaign will reduce BVPS by increasing costs. However, if this builds brand equity and the company is able to charge premium prices or its products, its stock price could go well above its BVPS.
frequently asked Questions
What does book value per share (BVPS) tell you?
In theory, BVPS is the amount shareholders would receive if the company were liquidated, all property, plant and equipment were sold, and all liabilities were paid. However, its value lies in the fact that investors use it to measure whether a stock price is undervalued by comparing it to the company’s market value per share. If a company’s BVPS is higher than its market value per share, which is its current share price, the stock is considered undervalued.
How can companies increase BVPS?
A company can use part of its earnings to buy assets that would increase its share capital along with BVPS. Or it could use its profits to reduce debt, which would also increase its share capital and BVPS. Another way to increase BVPS is to buy back common stock from shareholders, and many companies use the profits to buy back shares.
How is BVPS different from market value per share?
While BVPS is calculated using historical costs, the market value per share is a forward-looking metric that takes into account a company’s future earnings power. An increase in a company’s potential profitability or expected rate of growth should increase its market value per share. Essentially, the market price per share is the current price of a single share of a publicly traded stock. In contrast to BVPS, the market price per share is not fixed as it fluctuates solely due to the market forces of supply and demand.