Definition: Book value per share (BVPS) is a ratio used to compare a firm’s common shareholder’s equity to the number of shares outstanding. In the case that the firm dissolves, it is the amount the shareholders will receive.
What Does Book Value per Share Mean?
What is the definition of book value per shares? Book value per share is broadly used in relative valuation and usually to compare a firm’s market value per share. If a firm’s BVPS is higher than its market value per share, then the stock is undervalued, which means that it trades lower than the price that the market determines.
Therefore, the BVPS can determine if a stock is undervalued or overvalued and it helps investors understand how a stock behaves. To calculate the book value per share formula, we need to know the common shareholder’s equity, the amount of preferred stocks and the number of shares outstanding.
Let’s look at an example.
Jeremy works as a financial analyst at Mervin Securities. He is asked to calculate the book value per share of a stock and check if the stock trades at a fair value. Jeremy sees in the company’s balance sheet that the firm has 1,000,000 $1 par value common stocks outstanding with 100,000 shares in treasury, $500,000 of preferred stocks, and $180,000 of retained earnings.
To calculate the common shareholder’s equity for Stock A, Jeremy adds the retained earnings to the common stocks. Therefore, the common shareholder’s equity for Stock A is $1,000,000 of stock outstanding – $100,000 of treasury stock + $180,000 of retained earnings = $1,080,000.
To calculate the number of shares outstanding, Jeremy deducts the treasury stocks from the common stocks. Therefore, the number of shares outstanding is 1,000,000 – 100,000 = 900,000.
BVPS = (common shareholder’s equity – preferred stock) / number of shares outstanding = ($1,080,000 – $500,000) / 900,000 = $680,000 / 900,000 = $0.64.
The market price of this stock is $76.12. Therefore, the stock is overvalued.
Define Book Value Per Share: BVPS is a ratio that measures how much a single stock is worth by dividing common shareholder’s equity by the number of shares outstanding.