What Is Book Value Per Share: How Essential is it?
As an investor, you may have different criteria for selecting stocks. One such parameter some novice investors may use is choosing a stock based on the BVPS (book value per share). If you are not familiar with this concept, take a look at what it means and if it can be a helpful parameter for picking a stock. So, what exactly is book value per share?
Meaning of Book Value Per Share
As the name suggests, the BVPS or book value per share is the individual value of every share in a listed company. When investors are looking for undervalued stocks that may have good growth potential, they turn to the book value per share, which helps them identify the value of the required stock. Stocks are undervalued if their book value per share is higher than their current stock price in the market.
To calculate the book value per share, the assets of the company are totalled. All the liabilities, debt as well as the liquidation price of the preferred stock are subtracted, and the resultant figure is to be divided by the common stock’s outstanding shares. Thus, the formula is as given below:
BVPS = (total shareholders’ equity – preferred equity) / total number of outstanding common shares
But do all investors depend on the book value per share for seeking out stocks? The answer is yes and no. Investors who lean towards a value-first approach mainly rely on the BVPS to identify their stock value while other investors may look at the BVPS along with many other factors such as the company’s financials.
Also Read: What are Cumulative Preferences Shares?
Relevance of BVPS in the Share Market
BVPS in the share market plays a role in stock assessment. If you want to understand how important the book value per share is in the share market, here are a few things you should keep in mind.
The BVPS is important for value investors who seek a discount on the stock and are, therefore, reliant on the BVPS to come to the real value of the stock. For example, if a company’s stock is trading below its book value, value investors can choose the shares available at a price lower than the stock’s value.
The book value of a share should not be confused with its market value. While the BVPS is an important parameter to evaluate a stock, it is relevant from the accounting perspective and may not reflect the market value of the company. The C-level management of the company decides what accounting model would be suitable for calculating the book value of their share.
However, an investor can use the book value and the market value to figure out if the market is bullish or bearish. So, if the market value of the company is more robust than the book value, the market signifies a bullish trend, while if the scenario is the other way round or if the book value and market value are closer, it signifies a bearish trend.
Mainly conservative investors look at the book value per share to measure the stock’s value. But if a company sells all its assets and pays up all its debts, its value will be identified only by the book value. In this sense, the book value is the most traditional way of measuring a stock’s potential value compared to other stock valuation methods such as the company’s financials, where the future growth and earnings estimates are also considered.
To conclude, it can be said that the BVPS can help value investors get an actual view of a company’s value in equity. And the reason the book value is so important for them is that it helps them identify if the stock is undervalued, which opens up a potential investment opportunity.
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Frequently Asked Questions
New investors should select stocks based on their research. This should include studying a company’s financials, future growth potential, the current market trends and more. The book value per share of a stock may be a reliable method to select stocks, but it is more popular among value investors with adequate experience in the stock market.
Stocks of different companies perform differently in the market, and that is how they are identified as long-term and short-term investments. Stocks that belong to the second category tend to show a lot of price movement and are better for the short term.
This will also depend on whether you are an investor who wants to pick and hold stocks for a matter of months or years or if you’re a trader who buys and sells stocks over a single day or a few days.
To consider only the book value to understand a stock’s potential value is a conservative approach. If there are other stock valuation models that study the company’s earnings, then those should also be taken into account. If other models are less stable, the book value can be a reliable parameter.