The book value per share and the market value per share are some of the tools used to evaluate the value of a company’s stocks. The market value per share represents the current price of a company’s shares, and it is the price that investors are willing to pay for common stocks. The market value is forward-looking and considers a company’s earning ability in future periods. As the company’s expected growth and profitability increase, the market value per share is expected to increase further.
On the other hand, book value per share is an accounting-based tool that is calculated using historical costs. Unlike the market value per share, the metric is not forward-looking, and it does not reflect the actual market value of a company’s shares.
The BVPS is a conservative way for investors to measure the real value of a company’s stocks, which is done by calculating what stockholders will own when the company liquidates and all debts paid up. Value investors prefer using the BVPS as a gauge of a stock’s potential value when future growth and earnings projections are less stable.
Calculating Book Value Per Share
Subtract the company’s reported liabilities from the reported value of its assets to obtain the overall book value. You can get this information from the company’s filings, which are public if you’re buying publicly traded stock.
Take the book value and divide it by the number of outstanding shares. Example where XYZ Company has 100,000 outstanding shares and a book value of $2 crores, the book value per share is $20 (the value divided by the number of shares).
Calculating Market Value Per Share
Market value per share is an easier calculation, because it’s available to the public. Look at the stock market to see the price of shares for that company on that day, and you’ll have the market value per share. XYZ Company’s shares are trading at $100 per share, and so that’s the market value per share.
What Does the Book Value of Equity Per Share Tell You?
The book value of equity per share (BVPS) metric can be used by investors to gauge whether a stock price is undervalued, by comparing it to the firm’s market value per share. If a company’s BVPS is higher than its market value per share—its current stock price—then the stock is considered undervalued. If the firm’s BVPS increases, the stock should be perceived as more valuable, and the stock price should increase.
In theory, BVPS is the sum that shareholders would receive in the event that the firm was liquidated, all of the tangible assets were sold and all of the liabilities were paid. However, as the assets would be sold at market prices, and book value uses the historical costs of assets, market value is considered a better floor price than book value for a company.
If a company’s share price falls below its BVPS a corporate raider could make a risk-free profit by buying the company and liquidating it. If book value is negative, where a company’s liabilities exceed its assets, this is known as a balance sheet insolvency.
How to Increase the Book Value Per Share
A company can use the following two methods to increase its book value per share:
1) Increase assets and reduce liabilities
A company can also increase the book value per share by using the generated profits to buy more assets or reduce liabilities. For example, if Reliance generates $1 Billion in earnings during the year and uses $200 Million to purchase more assets for the company, it will increase the common equity, and hence, raise the BVPS. Similarly, if the company uses $200 Million of the generated revenues to pay up debts and reduce liabilities, it will also increase the equity available to common stockholders.
2) Repurchase common stocks
Other of increasing the book value per share is to buy back common stocks from shareholders. Assume that the company repurchases 5 Crore common stocks out of 30 crore shares outstanding from its shareholders. The new current shares outstanding will be 25 crore
and in turn will increase the BVPS
Book Value and Market Value Examples
Netflix filed its third quarter financial statements with the SEC showing assets of about $23.4 billion and liabilities of about $18.4 billion for a book value of about $5 billion. With 436,084,995 outstanding shares at the end of that quarter, the book value per share was only about $11.47. However, on September 28, 2018, two days prior to the end of the quarter, the market price per share was $374.13, or more than 32 times book value.
Apple, meanwhile, reported about $349 billion in assets at the end of the second quarter in 2018 and about $234 billion in liabilities for a rough book value of $115 billion. About 4.8 billion shares were outstanding at the time, so the book value per share was about $23.96 per share. Apple stock closed on June 29, 2018 at $185.11 per share.
So while Netflix’s book value was less than half of Apple’s, its market value was nearly twice Apple’s market value
Investing Based on Market and Book Value
You can compare book value and market value to make investment decisions. A person looking at XYZ Company, for instance, might note that its market value is higher than its book value. If XYZ Company has little in the way of tangible assets but makes a lot of money off of those assets, or has potential to make a lot of money in the future, its higher market value would make sense. The market on the whole has confidence that XYZ Company will become or remain profitable.
If book value is more than market value, many investors will see it as an opportunity to buy stock at a low price for a company that does fairly well. Others may see it as evidence that the company or its industry are not going to be relevant later.