Definition
The Book Value per Share formula refers to a financial ratio used to measure a company’s net asset value per share. It is calculated by subtracting the company’s total liabilities from its total assets and then dividing by the number of outstanding shares. Essentially, it denotes the portion of a company’s value that can be claimed by each individual shareholder if the company was to be liquidated.
Key Takeaways
- The Book Value per Share Formula calculates the per-share value of a company based on common shareholders’ equity in the company. It helps investors understand what they could potentially receive if the company was liquidated.
- The formula for calculating the Book Value per Share is a company’s total shareholders’ equity (excluding preferred equity) divided by the total number of shares outstanding. Consequently, it a key indicator of a company’s intrinsic value.
- Book Value per Share is one of the tools that investors and analysts use to assess the financial health and market position of a company. However, it’s important to remember it does not reflect the market value of the company or its potential for future earnings growth.
Importance
The Book Value per Share Formula is critical in financial analysis because it informs investors about the company’s net value – equivalent to the amount that shareholders would receive if the company were to be liquidated.
The formula calculates this by taking the total value of the company’s assets and subtracting any liabilities.
The result gives the net asset value of the company, which is then divided by the number of existing shares to give the book value per share.
In essence, this figure serves as a baseline value for each share of stock and can be compared to the market price to determine if the stock is undervalued or overvalued, thereby informing investment decisions.
Explanation
The Book Value per Share (BVPS) formula is used to measure a company’s true value per common share. It represents a reliable gauge of a company’s intrinsic worth, independent of the stock market price.
This value is vital for investors looking to determine whether a company’s stock price is overvalued or undervalued. Essentially, it provides the conceivably obtained amount per share if the enterprise were to be liquidated at that moment.
Apart from serving as a tool for investors, it is also utilized by the leadership of companies themselves. The Book Value per Share formula can identify if the business is growing in value over time.
If they observe a continuous increase, it shows that the company is accumulating more assets or paying off its debts, implying its financial health is improving. Conversely, if a decreasing trend is noted, it might signal a cause for concern, prompting internal discussions and plans for improvement.
Examples of Book Value per Share Formula
Johnson & Johnson (J&J): If you look at J&J’s 2020 annual report, you’ll see that they reported a total shareholders’ equity of approximately $64 billion and a total common shares outstanding of around6 billion. To calculate J&J’s book value per share, you’d simply divide the shareholders’ equity by the number of shares. In this case, J&J’s book value per share is about $
Coca-Cola Company: Using the 2020 financial statements, the total equity attributed to Coca-Cola shareholders was about $19 billion, while outstanding shares stood at about3 billion. When you divide $19 billion by
3 billion, you are left with a book value per share of roughly $Alphabet Inc., the parent company of Google: According to their annual report in 2020, Alphabet ended the year with shareholders’ equity of approximately $201 billion and had about 681 million common shares outstanding. Dividing these figures gives a book value per share of approximately $
Frequently Asked Questions about Book Value per Share Formula
1. What is the Book Value per Share Formula?
The Book Value per Share formula is used to calculate the per share value of a company based on its equity available to common shareholders. The formula is: Book Value per Share = (Total Equity – Preferred Equity) / Total Outstanding Shares.
2. How is Book Value per Share used in finance?
Book Value per Share is commonly used by investors to gauge whether a stock is undervalued or overvalued by comparing it to the company’s market value per share. If the book value per share is higher than the market value per share, the stock could be undervalued, and vice versa.
3. What is the difference between Book Value and Market Value?
Book Value is the value of an asset according to its balance sheet account balance. Market Value, on the other hand, is the price that the asset (or a liability) would fetch in the marketplace.
4. What are the limitations of the Book Value per Share Formula?
While useful, the Book Value per Share Formula does have its limitations. It does not consider the company’s future earning potentials or intangible assets, which can be a significant part of a company’s real value. Always use it in conjunction with other financial formulas and indicators.
Related Entrepreneurship Terms
- Equity Share Capital
- Preferred Shares
- Outstanding Shares
- Net Assets
- Company’s Financial Statements
Sources for More Information
- Investopedia: A comprehensive online financial education source, providing concepts from basic to advanced financial education, including “Book Value per Share Formula”.
- CFA Institute: This professional organization offers financial education and resources to finance professionals. Their resources may include more detailed explanations of “Book Value per Share Formula”.
- Accounting Tools: A great resource for learning about accounting concepts, including more in-depth information on the “Book Value per Share Formula”.
- Corporate Finance Institute: An institute that provides online financial training and related resources to finance professionals and enthusiasts, including topics like the “Book Value per Share Formula”.
