Everything you need to know about book value per share
Book Value Per Share: What is BV, How to Calculate It and Why It Is Important
"Book value per share" — this is a market concept that helps investors determine the true worth of a stock. The figure indicates the actual value of a share in light of the assets and liabilities shown in the company’s books of accounts. This is in contrast to the market value per share, which is the price at which the share is traded in the stock market. This is the main justification for investors considering book value per share to steer clear of stocks that are either overvalued or undervalued in the stock market. It is a ratio that represents the minimum value of a company's equity and measures the book value of a company on a per-share basis.
How to Calculate Book Value of Share?
A company's book value per share can be calculated by dividing its common equity base by the number of outstanding common equity shares. This number shows the book value of the company’s shares. The book value per share is calculated as follows:
Book Value per share formula = (Stockholders’ Equity - Preferred Stock) / Average Shares Outstanding
The weighted mean number of shares outstanding takes into consideration changes brought about by new issuances and bulk buyouts over a chosen period, compared to the actual value of shares outstanding. When included in the formula, it provides a more complete depiction of book value per share.
How to Improve Book Value Per Share?
There are two ways for companies to improve their book value per share. These are:
Purchasing shares from common stockholders
In the formula for book value per share, the denominator controls the value of the outcome. The book value per share will decrease as the number of outstanding shares rises. Alternatively, the book value per share will increase if shares are bought back from shareholders. However, before making such a purchase, it is vital that the management carefully weigh the costs and benefits of doing so.
Controlling Resources and Liabilities
Liabilities increase when common equity decreases, which lowers the book value per share. Put aside a certain amount of your profits to either buy new assets or pay off liabilities rapidly to raise the company's book value per share. This should increase the book value per share while maintaining the same share price for the aforementioned period.
Importance of Book Value Per Share
The value that each stakeholder is entitled to is shown by the book value per share, which accounts for the shareholders' equity distributed among the total number of stockholders. The shareholders can access the remaining assets if the company goes bankrupt, all of its tangible assets are sold, and its obligations are paid. This is, in essence, the minimal return on investment that shareholders will be given.
Knowing a company's true share value and comparing it to the market value and patterns is crucial when making an investment decision. It becomes easier for you to visualize the investments and their probable profitability over time.