What Is Book Value Per Share (BVPS)?
Let me explain book value per share (BVPS) directly: it's a measure of a company's total assets minus its liabilities, then divided by the number of shares outstanding.
Theoretically, BVPS represents the amount shareholders would get if the company went out of business, sold all its tangible assets, and paid off all debts.
You should know that stock analysts use BVPS to evaluate if a stock is underpriced or overpriced by comparing it to the current market value.
Key Takeaways
- Book value per share (BVPS) is a number used by stock analysts to determine whether a stock is currently underpriced or overpriced.
- When a company's BVPS is higher than its current stock price, the stock appears to be undervalued in the market.
- BVPS is the amount that would be returned to shareholders in the event the company goes into bankruptcy.
Measuring Book Value Per Share (BVPS)
The BVPS metric helps you gauge if a stock price is undervalued by comparing it to the firm’s market value per share. It's what shareholders receive if the firm is liquidated, all tangible assets are sold, and all liabilities are paid.
Here's the formula: BVPS = (Total Equity - Preferred Equity) / Total Shares Outstanding.
A company’s stock is considered undervalued when BVPS is higher than its market value or current stock price. If BVPS increases, the stock is perceived as more valuable, and the price should rise.
If a company’s share price falls below its BVPS, a corporate raider could make a risk-free profit by buying the company and liquidating it. If book value is negative, where liabilities exceed assets, this indicates balance sheet insolvency.
Remember, since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred stock is subtracted from shareholders’ equity to derive the equity available to common shareholders.
Example of BVPS
Take XYZ Manufacturing as an example: it has a common equity balance of $10 million and 1 million shares of common stock outstanding. That gives a BVPS of ($10 million / 1 million shares), or $10 per share.
If XYZ generates higher profits and uses them to buy assets or reduce liabilities, the firm’s common equity increases. For instance, if it generates $500,000 in earnings and uses $200,000 to buy assets, common equity and BVPS go up. Using $300,000 to reduce liabilities also increases them.
Another approach is repurchasing common stock from shareholders. If XYZ repurchases 200,000 shares, leaving 800,000 outstanding, and common equity is $10 million, BVPS rises to $12.50 per share.
What Does Book Value Per Share (BVPS) Tell Investors?
BVPS is the sum shareholders would receive if the firm is liquidated. You can use it to gauge if a stock price is undervalued by comparing it to the firm’s market value per share.
How Can Companies Increase BVPS?
A company can use a portion of its earnings to buy assets that increase common equity along with BVPS. Or it could use earnings to reduce liabilities, which would also boost common equity and BVPS.
How Does BVPS Differ From Market Value Per Share?
The calculation for BVPS uses historical costs. However, the market value per share—a forward-looking metric—accounts for a company’s future earning power. As a company’s potential profitability or expected growth rate increases, the corresponding market value per share will also increase.
The Bottom Line
Book value per share (BVPS) tells you the book value of a firm on a per-share basis. You use BVPS to gauge whether a stock price is undervalued by comparing it to the firm’s market value per share.
Book value refers to a firm’s net asset value (NAV), or its total assets minus its total liabilities.
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