What Is Book Value Per Common Share?
Book Value Per Common Share (BVPS) is a financial measure used to gauge the value of a company’s common stock based on its equity available after satisfying all liabilities. Essentially, it reflects what shareholders would purportedly receive per share if the company were liquidated, making it a critical figure for investors gauging the intrinsic stock values against market values.
Calculation of BVPS
The formula for Book Value Per Common Share breaks down as follows: \( BVPS = \frac{Total Shareholder Equity - Preferred Equity}{Total Outstanding Shares} \)
This formula deducts any preferred equity from total shareholders’ equity, as preferred shareholders have priority over common shareholders in asset claims. The remainder is then divided by the total number of outstanding common shares, providing a per-share value of the company’s net equity.
Insights from BVPS
BVPS offers a snapshot of the company’s financial health from the perspective of shareholder equity. A higher BVPS suggests that a company has generated substantial equity relative to the number of common shares, potentially indicating underpricing by the market if the market value per share is lower than the BVPS. Conversely, a low BVPS might signal overvaluation, or that a company has fewer assets per share than one might ideally want.
Example Scenario
Imagine XYZ Manufacturing has $10 million in common equity with 1 million shares outstanding. The BVPS would be: \( BVPS = \frac{$10 million}{1 million shares} = $10 \) If XYZ’s market share price is $8, this might indicate the stock is undervalued, as the book value exceeds the market price.
Book Value vs. Market Value
Market Value Per Common Share, contemporarily represented by a company’s stock price, can diverge significantly from BVPS. Market value can spike based on future potential or plummet during crises, reflecting investor sentiment and market conditions, unlike BVPS which is more static and accounting-based.
Related to BVPS
- Net Asset Value (NAV): Similar to BVPS, but used for mutual funds and ETFs, representing the per-share value of the fund’s securities.
- Total Shareholder Equity: The net value of a company after all liabilities are settled.
- Preferred Equity: Equity which has priority over common shares regarding assets and earnings distribution.
- Liquidation Value: The net cash that would be received if all assets were sold and liabilities paid.
Further Learning Resources
“Security Analysis” by Benjamin Graham and David Dodd
This classic text dives deep into valuation methods, including BVPS.
“The Interpretation of Financial Statements” by Benjamin Graham A more accessible read by Graham that helps investors decode key financial metrics.
With its blend of comprehensive definitions and illustrates examples, BVPS remains a cornerstone measure for diligent investors navigating the stock markets’ often murky waters.
