Book Value Per Share
Metrics
Overview
Book Value Per Share is simply the number that we get when we divide the company's book value (also known as equity) by the number of outstanding shares that the company has in total. Book value or equity is the company's total assets minus the total liabilities.
The equity can be found on a company's balance sheet, and it is one of the most common financial metrics used by investors to assess the financial health of a company. Book value per share is simply the equity of the company divided by the number of shares, and it is useful as it gives us the value in a per-share format that makes it more intuitive to compare it with the price of the stock of the company.
Alternative Names: Equity Per Share
Formula
Book Value per Share = Shareholders' Equity ÷ Number of Common Outstanding Shares
Components: The Book Value or Equity can be found on the balance sheet of the company's financial reports. Shares outstanding refers to all shares currently owned by stockholders, company officials, and investors in the public domain, but does not include shares repurchased by a company. The number of shares outstanding is also listed on a company's balance sheet, usually under the name "Capital Stock".
Important: We base the calculation on the common stockholders' equity, and therefore the preferred stock should be excluded from the value of equity. This is because preferred stockholders are ranked higher than common stockholders during liquidation, and the Book Value Per Share represents the value of equity that remains after paying up all debts and the company's assets are liquidated.
Calculation Example
Let's calculate the book value per share for a hypothetical company to demonstrate the process:
Example Company - Financial Data:
- Shareholders' Equity (Common): $10,000,000
- Number of Common Outstanding Shares: 2,000,000
Calculate Book Value Per Share
Book Value per Share = Shareholders' Equity ÷ Number of Common Outstanding Shares
Book Value per Share = $10,000,000 ÷ 2,000,000
= $5.00 per share
Interpretation: A book value per share of $5.00 means that each common share represents $5.00 of the company's equity (total assets minus total liabilities). This per-share format makes it intuitive to compare with the stock price. For example, if the stock is trading at $10.00 per share, it is selling at 2 times its book value, meaning investors are paying twice the equity value per share.
How to Interpret
When compared to the current market value per share (stock price), the book value per share can provide information on how a company's stock is valued. If the value of Book Value Per Share exceeds the market value per share, the company's stock can be considered as undervalued (at least on an asset/equity basis).
General Guidelines:
Book Value Per Share > Market Price: Potentially Undervalued
When book value per share exceeds the market value per share (stock price), the company's stock can be considered potentially undervalued, at least on an asset or equity basis. This suggests the market is pricing the stock below its accounting book value, which may indicate an investment opportunity if the company's assets are accurately valued and the business fundamentals are sound.
Book Value Per Share ≈ Market Price: Fair Value
When book value per share is approximately equal to the market value per share, the stock is trading near its equity value. This suggests the market is valuing the company close to its accounting book value, representing a balanced valuation where the stock price aligns with the company's net asset value per share.
Book Value Per Share < Market Price: Premium Valuation
When book value per share is lower than the market value per share (stock price), the company is selling at a premium to its equity value. This is common for growth companies and businesses with strong intangible assets (brand value, patents, goodwill) not fully reflected in book value. The market is pricing in future growth potential beyond current asset values.
Important Note: It is important to notice that book value number does not reflect the future growth potential of the company. Book value is based on historical accounting values and may not capture intangible assets, brand value, or future earnings power. Always consider book value per share in conjunction with other valuation metrics and growth prospects.
Why It Matters
The only difference between book value per share and Book Value or Equity is that the former is represented on a per-share basis. This per-share format provides important benefits that make the metric more useful for investors and analysts.
Key Insights:
- Intuitive Price Comparison: The benefit of per-share format is that it is more intuitive when comparing the equity of the company with the share price of the company. For example, a company that has a stock price of $50 but has a book value per share of $25 is selling at twice its equity value, making the valuation relationship immediately clear.
- Price to Book Ratio Component: The per-share value of equity is used in the price-to-book value (P/B) ratio, in which book value per share is used in the denominator. This ratio helps investors assess whether a stock is trading at a premium or discount to its accounting book value, providing a key valuation metric.
- Financial Health Assessment: Equity can be found on a company's balance sheet, and it is one of the most common financial metrics used by investors to assess the financial health of a company. Book value per share makes this assessment more accessible by normalizing equity to a per-share basis for easy comparison.
- Undervaluation Identification: When compared to the current market value per share, book value per share can provide information on how a company's stock is valued. If book value per share exceeds market value per share, the stock can be considered potentially undervalued (at least on an asset/equity basis), helping investors identify potential investment opportunities.
Key Takeaways
- Book Value Per Share is the number obtained when dividing company's book value (equity) by number of outstanding shares
- Book value or equity equals company's total assets minus total liabilities
- Equity found on company's balance sheet, one of most common financial metrics for assessing financial health
- Useful as it gives value in per-share format making it more intuitive to compare with stock price
- Formula: Book Value per Share = Shareholders' Equity ÷ Number of Common Outstanding Shares
- Shares outstanding refers to all shares owned by stockholders, officials, and investors, excludes repurchased shares
- Number of shares outstanding listed on balance sheet under "Capital Stock"
- Based on common stockholders' equity, preferred stock should be excluded from equity value
- Preferred stockholders ranked higher than common stockholders during liquidation
- Represents value of equity remaining after paying all debts and company assets liquidated
- Only difference from Book Value/Equity is per-share representation, benefit is more intuitive comparison with share price
- Example: stock price $50 with book value per share $25 means selling at twice equity value
- Per-share equity value used in price-to-book value (P/B) ratio as denominator
- Important: book value number does not reflect future growth potential of company
- When book value per share exceeds market value per share, stock can be considered undervalued (on asset/equity basis)
Related Financial Ratios
These related metrics provide additional insights for comprehensive financial analysis:
Price to Book Ratio (P/B)
Valuation ratio comparing stock's market price to its book value per share. Uses book value per share in the denominator to calculate P/B = Market Price ÷ Book Value Per Share. This ratio helps investors assess whether a stock is trading at a premium or discount to its accounting book value, directly building on book value per share to provide valuation insight.
Return on Equity (ROE)
Profitability ratio measuring returns generated on shareholders' equity. While book value per share shows the per-share equity value (what shareholders theoretically own), ROE shows how effectively the company uses that equity to generate profits. Together, they provide both the equity base per share and the returns being generated on that equity base.
Tangible Book Value Per Share (TBVPS)
Similar to book value per share but excludes intangible assets like goodwill, patents, and brand value. TBVPS = (Shareholders' Equity − Intangible Assets) ÷ Outstanding Shares. This provides a more conservative measure of per-share equity value by focusing only on tangible assets that have physical substance and could be liquidated, useful for asset-heavy industries where tangible assets dominate.