Definition: The book value per common share is a financial ratio that calculates amount of equity applicable to each outstanding common stock. In other words, this is the equity value of each common stock.
Book value per share is usually used to compute the value or price per share of a company’s stock during liquidation. This makes sense because equity represents the net assets of a business. If all of the assets were sold off and all of the liabilities were paid off, the shareholders would be left with the equity. This is a good starting point to calculate the value of a share of common stock.
Book value per common share is calculated by dividing the stockholders’ equity applicable to common shareholders by the number of outstanding common shares. Notice the only the equity applicable to common shareholders is used. Equity that is restricted or set aside for preferred shareholders or dividends can’t be included in this total.
Book value per share is also used to negotiate mergers, acquisitions, and loan contracts. During an acquisition, the purchasing company needs to calculate a baseline price that the common shares are worth before negotiations can take place. Book value is a good starting point because it is objective and shows a selling price or liquation value of the shares.
Keep in mind that this is just starting point. Common shares can’t possibly be measured using book value alone. What about the difference between book value and market value? Some assets on the balance sheet are recorded at costs that don’t truly reflect their fair market value. For instance, a building that was purchased 30 years ago is probably worth more today than it was on the original purchase date.