/midsection-of-businessman-explaining-to-colleagues-in-meeting-at-office-944190518-558c13011ce94b83816fb19217a6a7c3.jpg "Definition of tangible book value per share (TBVPS).")
What is tangible book value per share (TBVPS)?
Tangible book value per share (TBVPS) is a method of determining a company’s value on a per share basis by evaluating its equity without considering intangible assets. Intangible assets are those that lack physical substance, making their valuation a more difficult endeavor than valuing tangible assets.
TBVPS is similar to price-to-tangible book value (PTBV).
The central theses
- Tangible book value per share (TBVPS) is the value of a company’s tangible assets divided by its current shares outstanding.
- TBVPS calculates a company’s potential value per share if it were to liquidate its assets.
- Assets such as property, plant and equipment are considered property, plant and equipment. Intangible assets such as goodwill are not included in the calculation of TBVPS.
- One of the criticisms of the validity of TBVPS is the lack of accuracy in accounting for a company’s tangible assets.
The formula for TBVPS
TBVPS
=
Total tangible assets
Total number of shares outstanding
Where:
TBVPS
=
tangible book value per share
begin{aligned} &text{TBVPS} = frac { text{Total Tangible Assets} }{ text{Total Number of Outstanding Shares} } &textbf{where:} &text{TBVPS } = text{material book value per share} end{aligned} TBVPS=Total number of shares outstandingTotal tangible assetsWhere:TBVPS=tangible book value per share
Understand the tangible book value per share
A company’s tangible book value (TBV) is what common shareholders can expect if a company goes bankrupt – forcing liquidation of its assets at book value price. Intangible assets such as goodwill are not included in tangible book value as they cannot be sold during liquidation. However, companies with high tangible book values tend to offer shareholders more downside protection in the event of bankruptcy.
Tangible book value per share therefore focuses solely on the value of an organization’s tangible assets, such as buildings and equipment. Once the value of the tangible assets is determined, that amount is divided by the number of shares currently outstanding in the company. The amount determined is recognized as the company’s TBVPS.
The TBV prepares an estimate of the company’s value when it goes bankrupt and is forced to liquidate all of its assets. Since certain intrinsic properties such as goodwill or employee knowledge cannot be liquidated against a price, TBV does not include any intangible assets. The TBV only applies to physical items that can be handled and sold at an easily ascertainable market value.
Certain online databases and websites allow potential investors to examine the progress of a company’s TBVPS over time.
Requirements for the tangible book value per share
An organization’s tangible assets can include all of the physical products that the company manufactures and all of the materials used in their manufacture. For example, if an organization were to manufacture bicycles, any completed bicycles, unused bicycle parts, or raw materials used in the bicycle manufacturing process would be considered tangible assets. The value of these assets is determined by the price they would fetch if the company were forced into liquidation, most commonly in the event of bankruptcy.
Aside from assets related to the manufacture of a product, any equipment used to manufacture the product may also be included. This may include any tooling or machinery required to complete the production, as well as any real estate owned by the production and used for production purposes. Ancillary office equipment such as computers and filing cabinets may also qualify as property, plant and equipment for valuation purposes.
Criticism of TBVPS
Book value refers to the ratio of equity to the number of outstanding shares. It only considers accounting valuation, which does not always accurately reflect current market valuation or what could be achieved in a sale.
