Book Value Per Share and Value Investing
Investors often want to know the book value of a common stock to understand what they would receive as payment for each share with regard to the worth that is shown on the company balance sheet. In cases where a company is being liquidated, the book value is used at to pay off company shareholders. Even in the case of sound and fundamentally strong companies, the Book Value Per Share (BVPS) can provide a good reference in determining fair value for the stock.
Many of the great value investors rely heavily on book value per share in assessing the attractiveness of a company as a potential investment. In fact, many take a dynamic approach to the measure and observe the growth (or decline) in a company’s book value per share over time.
Calculating the Book Value Per Share
In calculation book value per share, the company liabilities are subtracted from its assets and the result is divided by the total number of shares outstanding.
Book Value Per Share = Assets – Liabilities / Common Shares Outstanding
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The Tangible Book Value Per Share (TBVPS) is calculated to determine what common shareholders would receive if the company went bankrupt and its assets were liquidated at their book values. With TBVPS, intangible assets (like goodwill) are not considered because they cannot be sold at liquidation. A high TBVPS provides greater insurance to investors if the company were to fail.
Book Value Per Share and the Value Investor
Value investors look to see that if the company’s BVPS is higher than the current stock price, which would indicate that the company is undervalued. On the other hand, if the book value per share is significantly lower than the stock price, the stock may be currently overvalued.
Not Everyone Sees the Value
Other stock investors do not see the usefulness in the BVPS calculation, arguing that a stock’s market and book values have little in common. This is due to the fact that the market value (the current price per share) is a reflection of supply and demand for that and expectations of future performance. But even these investors would agree when the market price or value is falls below the book value there could be a good opportunity for investment.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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