Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business. The following image shows Coca-Cola’s “Equity Attributable to Shareowners” line at the bottom of its Shareowners’ Equity section. It’s one metric that an investor may look for if they’re interested in valuating Coca-Cola as a potential investment.
What Does a Price-to-Book (P/B) Ratio of 1.0 Mean?
The figure that represents book value is the sum of all of the line item amounts in the shareholders’ equity section on a company’s balance sheet. As noted above, another way to calculate book value is to subtract a business’ total liabilities from its total assets. BVPS relies on the historical costs of assets rather than their current market values. This approach can lead to significant discrepancies between the book value and the actual market value of a company’s assets.
Like other approaches, book value examines the equity holders’ portion of the profit pie. Unlike earnings or cash flow approaches, which are directly related to profitability, the book value method measures the value of the stockholders’ claim at a given point in accumulated depreciation time. An equity investor can deepen an investment thesis by adding the book value approach to his or her analytical toolbox. In the example from a moment ago, a company has $1,000,000 in equity and 1,000,000 shares outstanding.
The Formula for Book Value Per Common Share Is:
Book value per common share (or, simply book value per share – BVPS) is a method to calculate the per-share book value of a company based on common shareholders’ equity in the company. The book value of a company is the difference between that company’s total assets and total liabilities, and not its share price in the market. The book value per share and the market value per share are some of the tools used to evaluate the value of a company’s stocks. The market value per share represents the current price of a company’s shares, and it is the price that investors are willing to pay for common stocks. The market value is forward-looking and considers a company’s earning ability in future periods. As the company’s expected growth and profitability increase, the market value per share is expected to increase further.
How Does BVPS Differ from Market Value Per Share?
Making Calculations Practical Now it’s time to use the calculation for something. The first thing one might do is compare the price/BVPS number to the historic trend. In this case, the company’s price/BVPS multiple seems to have been sliding for several years. In this case, the stock seems to trade at a multiple that is roughly in line with its peers. The book value per share of a company is the total value of the company’s net assets divided by the number of shares that are outstanding. It depends on a number of factors, such as the company’s financial statements, competitive landscape, and management team.
- We need to divide the shareholders’ equity available to common stockholders by the number of common shares.
- The ratio may not serve as a valid valuation basis when comparing companies from different sectors and industries because companies in other industries may record their assets differently.
- If there is no preferred stock, then simply use the figure for total shareholder equity.
Book value is the value of a company’s total assets minus its total liabilities. While corporate debt holders and preferred shareholders are entitled to a fixed series of cash payments, the cash flow in excess of those amounts is essentially the property of the common shareholders. The value of a common stock, therefore, is related to the monetary value of the common shareholders’ residual claim on the corporation – the net asset value or common equity of the corporation. The book value per share (BVPS) ratio compares the equity held by common stockholders to the total number of outstanding shares. To put it simply, this calculates a company’s per-share total assets less total liabilities. To get BVPS, you divide the figure for total common shareholders’ equity by the total number of outstanding common shares.
For value investors, this may signal a good buy since the market price generally carries some premium over book value. Book value is the value of a company’s assets after netting out its liabilities. It approximates the total value shareholders would receive if the company were liquidated. BVPS is typically calculated and published periodically, such as quarterly or annually. This infrequency means that BVPS may not always reflect the most up-to-date value of a company’s assets and liabilities. If the company is going through a period of cyclical losses, it may not have positive trailing earnings or operating cash flows.
Therefore, an alternative to the P/E approach may be used to assess the current value of the stock. This is especially applicable when the analyst has low visibility of the company’s future earnings prospects. If a company has a book value per share that’s higher than its market value per share, it’s an undervalued stock. Undervalued stock that is trading well below its book value can be an attractive option for some investors.
In the food chain of corporate security investors, equity investors do not have the first crack at operating profits. Common shareholders get whatever is left over after the corporation pays its creditors, preferred shareholders and the tax man. But in the world of investing, being last in line can often be the best place to be, and the common shareholder’s lot can be the biggest piece of the profit pie. A good book value per share varies by industry, but generally, a higher value indicates a company’s assets exceed liabilities, suggesting a potentially stronger financial position. Comparing it to the stock price helps determine if a stock is trading at a reasonable value.
Measuring the Value of a ClaimA good measure of the value of a stockholder’s residual claim at any given point in time is the book value of equity per share (BVPS). Book value is the accounting value of the company’s assets less all claims senior to common equity (such as the company’s liabilities). Book Value Per Share is calculated by dividing the total common equity by the number of outstanding shares. Because book value per share only considers the book value, it fails to incorporate other intangible factors that may increase the market value of a company’s shares, even upon liquidation. For instance, banks or high-tech software companies often have very little tangible assets relative to their intellectual property and human capital what is the kiddie tax and how does it work (labor force). The Bottom Line Using book value is one way to help establish an opinion on common stock value.