What Is the Book Value Per Share?

What Is the Book Value Per Share explained by professional Forex trading experts the “ForexSQ” FX trading team. 

What Is the Book Value Per Share?

“Book value” represents a company’s assetsminus its liabilities and is sometimes referred to as stockholder’s equity, owner’s equity, shareholder’s equity, or simply equity. 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.

Book value per share is a market value financial ratio. The purpose of calculating book value per share is to relate shareholder’s equity to the number of shares of common stock outstanding.

Since the number of shares of preferred stock are not considered, this gives a more “real” value to the common shares outstanding.

Calculating Book Value Per Share

Here is the calculation of the book value per share:

Book Value Per Share = Shareholder’s Equity – Preferred Stock/Average Outstanding Common Stock

= $______

It’s important to use the average number of outstanding shares in this calculation as a period-ending amount might be based on a short-term event such as a stock buy-back, which would influence results and diminish their reliability.

Interpreting Book Value Per Share

This measurement is used by investors to evaluate the price of a company’s common stock. For instance, if the market value per share is lower than the book value per share, then the stock price may be undervalued.

However, book value is not market value. The book value of owners’ equity is not directly tied to the market value of a business and is essentially an accounting value, subject to management discretion in accounting policies.

Book value may be considered in varying degree in putting a market value on a business and its ownership shares.

There are interesting ways to look at book value. If market value is much higher than book value, the financial markets are likely experiencing a bull market. If the values are closer together, the financial markets may be in a bear market.

A Practical Example

Fictional Company A has $20,000,000 of stockholders’ equity, $5,000,000 of preferred stock, and an average of 5,000,000 shares outstanding. The calculation of its book value per share is:

$20,000,000 Stockholders’ equity – $5,000,000 Preferred stock, so 5,000,000 Average shares outstanding = $3.00 Book value per share

2 Considerations

There are 2 issues to consider:

  1. The market value per share is a forward-looking measure of what a company’s shares are worth; conversely, the book value per share is an accounting measure that is not forward-looking. The two measures are completely different and are based upon different information. Comparing them will lead you down a garden path.
  2. Some assets tend to be undervalued in the book value concept, sometimes considerably, because it is not easy to put a cash value on them. Examples include your brand and reputation, which you have spent years nurturing, or the value of in-house proprietary research and development , which could be very high, and yet this investment is only seen as expense. Patents, goodwill and intellectual property also fall into this category. These factors can contribute to the disparity between book value and market value.

What Is the Book Value Per Share Conclusion

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