Suppose that XYZ Company has total assets of $100 million and total liabilities of $80 million. If the company sold its assets and paid its liabilities, the net worth of the business would be $20 million. Let’s say that Company A has $12 million in stockholders’ equity, $2 million of preferred stock, and an average of 2,500,000 shares outstanding.

Companies Suited to Book Value Plays

Stock repurchases occur at current stock prices, which can result in a significant reduction in a company’s book value per common share. To get BVPS, you divide the figure for total common shareholders‘ equity by the total number of outstanding common shares. To obtain the figure for total common shareholders‘ equity, take the figure for total shareholders‘ equity and subtract any preferred stock value. If there is no preferred stock, then simply use the figure for total shareholder equity. The book value per share (BVPS) ratio compares the equity held by common stockholders to the total number of outstanding shares.

How to Interpret BVPS?

Assume XYZ repurchases 200,000 shares of stock, and 800,000 shares remain outstanding. Assume that XYZ Manufacturing has a biweekly meaning common equity balance of $10 million and 1 million shares of common stock are outstanding. This means that the BVPS is ($10 million / 1 million shares), or $10 per share.

Book value per share relates to shareholders’ equity divided by the number of common shares. Earnings per share would be the net income that common shareholders would receive per share (company’s net profits divided by outstanding common shares). When calculating the book value per share of a company, we base the calculation on the common stockholders’ equity, and the preferred stock should be excluded from the value of equity.

Formula to Calculate Carrying or Book Value

On the other hand, investors and traders are more interested in buying or selling a stock at a fair price. When used together, market value and book value can help investors determine whether a stock is fairly valued, overvalued, or undervalued. It is quite common to see the book value and market value differ significantly. The difference is due to several factors, including the company’s operating model, its sector of the market, and the company’s specific attributes. 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.

Market Value Examples

1. In this scenario, the market is giving investors an opportunity to buy a company for less than its stated net worth.
2. BVPS is significant for investors because it offers a snapshot of a company’s net asset value per share.
3. Investors can find a company’s financial information in quarterly and annual reports on its investor relations page.
4. Book value per share relates to shareholders’ equity divided by the number of common shares.
5. While market cap represents the market perception of a company’s valuation, it may not necessarily represent the real picture.
6. It approximates the total value shareholders would receive if the company were liquidated.

Companies get debt by taking loans from banks and other financial institutions or by floating interest-paying corporate bonds. They typically raise equity capital by listing the shares on the stock exchange through an initial public offering (IPO). Sometimes, companies get equity capital through other measures, such as follow-on issues, rights issues, and additional share sales. It is unusual for a company to trade at a market value that is lower than its book valuation. When that happens, it usually indicates that the market has momentarily lost confidence in the company. It may be due to business problems, loss of critical lawsuits, or other random events.

While Book Value Per Share can be a helpful indicator of a company’s tangible net assets, it has several limitations that investors should be aware of. 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. 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. The carrying value of an asset is its net worth—the amount at which the asset is currently valued on the balance sheet.

As a company’s potential profitability, or its expected growth rate, increases, the corresponding market value per share will also increase. If the book value is based largely on equipment, 5 ways debt can make you money rather than something that doesn’t rapidly depreciate (oil, land, etc.), it’s vital that you look beyond the ratio and into the components. Companies with lots of machinery, like railroads, or lots of financial instruments, like banks, tend to have large book values. In contrast, video game companies, fashion designers, or trading firms may have little or no book value because they are only as good as the people who work there. Book value is not very useful in the latter case, but for companies with solid assets, it’s often the No.1 figure for investors. Debt capital requires payment of interest, as well as eventual repayment of loans and bonds.

In contrast, gaming companies, consultancies, fashion designers, and trading firms may have very little. They mainly rely on human capital, which is a measure of the economic value of an employee’s skill set. Mathematically, book value is the difference between a company’s total assets and total liabilities. This formula shows the net asset value available to common shareholders, excluding any preferred equity. A P/B ratio of 1.0 indicates that the market price of a share of stock is exactly equal to its book value. For value investors, this may signal a good buy since the market price generally carries some premium over book value.