12/4/2019 Book Value Per Common Share - BVPS Definition

INVESTING FUNDAMENTAL ANALYSIS

Book Value Per Common Share - BVPS

Definition
REVIEWED BY ADAM HAYES | Updated Apr 17, 2019

What is Book Value Per Common Share?

Book value per common share (or, simply book value per share - BVPS) is a method to
calculate the per-share value of a company based on common shareholders' equity in the
company. Should the company dissolve, the book value per common share indicates the
dollar value remaining for common shareholders after all assets are liquidated and all
debtors are paid.

Understanding Book Value

The Formula for Book Value Per Common Share Is

The book value per common share (formula below) is an accounting measure based on
historical transactions:

T otal Shareholder Equity−P ref erred Equity

BV P S = T otal Outstanding Shares

What Does BVPS Tell You?

The book value of common equity in the numerator reflects the original proceeds a company
receives from issuing common equity, increased by earnings or decreased by losses, and
decreased by paid dividends. A company's stock buybacks decrease the book value and total
common share count. Stock repurchases occur at current stock prices, which can result in a
significant reduction in a company's book value per common share. The common share
count used in the denominator is typically an average number of diluted common shares for
the last year, which takes into account any additional shares beyond the basic share count
that can originate from stock options, warrants, preferred shares, and other convertible
instruments.

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KEY TAKEAWAYS
Book value per common share calculates the per-share value of a company based
on common shareholders' equity in the company.
Since preferred stockholders have a higher claim on assets and earnings than
common shareholders, preferred equity is subtracted from shareholder’s equity to
derive the equity available to common shareholders.
If a company’s BVPS is higher than its market value per share, then its stock may be
considered to be undervalued.

Example of BVPS
As a hypothetical example, assume that XYZ Manufacturing’s common equity balance is $10
million, and that 1 million shares of common stock are outstanding, which means that the
BVPS is ($10 million / 1 million shares), or $10 per share. If XYZ can generate higher profits
and use those profits to buy more assets or reduce liabilities, the firm's common equity
increases. If, for example, the company generates $500,000 in earnings and uses $200,000 of
the profits to buy assets, common equity increases along with BVPS. On the other hand, if
XYZ uses $300,000 of the earnings to reduce liabilities, common equity also increases.

The Difference Between Market Value per Share and Book Value per
Share
The market value per share is a company's current stock price, and it reflects a value that
market participants are willing to pay for its common share. The book value per share is
calculated using historical costs, but the market value per share is a forward-looking metric
that takes into account a company's earning power in the future. With increases in a
company's estimated profitability, expected growth, and safety of its business, the market
value per share grows higher. Significant differences between the book value per share and
the market value per share arise due to the ways in which accounting principles classify
certain transactions.

For instance, consider a company's brand value, which is built through a series of marketing
campaigns. U.S. generally accepted accounting principles (GAAP) require marketing costs to
be expensed immediately, reducing the book value per share. However, if advertising efforts
enhance the image of a company's products, the company can charge premium prices and
create brand value. Market demand may increase the stock price, which results in a large
divergence between the market and book values per share.
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The Difference Between Book Value per Common Share and Net
Asset Value (NAV)
While BVPS considers the residual equity per-share for a company's stock, net asset value, or
NAV, is a per-share value calculated for a mutual fund or an exchange-traded fund, or ETF. For
any of these investments, the NAV is calculated by dividing the total value of all the fund's
securities by the total number of outstanding fund shares. NAV is generated daily for mutual
funds. Total annual return is considered by a number of analysts to be a better, more
accurate gauge of a mutual fund's performance, but the NAV is still used as a handy interim
evaluation tool.

Limitations of BVPS
Because book value per share only considers the book value, it fails to incorporate other
intangible factors that may increase the market value of a company's shares, even upon
liquidation. For instance, banks or high-tech software companies often have very little
tangible assets relative to their intellectual property and human capital (labor force). These
intangibles would not always be factored in to a book value calculation.

Related Terms
Book Value of Equity Per Share: What You Need to Know
A company's book value of equity per share (BVPS) is the minimum value of its equity and is found by
dividing total common stock by the number of the company's outstanding shares. more

Enterprise Value – EV Definition

Enterprise value (EV) is a measure of a company's total value, often used as a comprehensive
alternative to equity market capitalization. EV includes in its calculation the market capitalization of a
company but also short-term and long-term debt as well as any cash on the company's balance sheet.
more

What the Price-To-Book Ratio – P/B Ratio Tells You?

Companies use the price-to-book ratio (P/B ratio) to compare a firm's market to book value and is
defined by dividing price per share by book value per share. more

How to Best Use the Debt-To-Capital Ratio

The debt-to-capital ratio is calculated by dividing a company’s total debt by its total capital, which is
total debt plus total shareholders’ equity. more

What is
Market momentum is a measure of overall market sentiment that can support buying and selling with
and against market trends. more

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What Does Cumulative Return Say About a Stock's Performance?

Expressed as a percentage, cumulative return is the total change in the price of an investment over a
set time period. As an aggregate figure, it is different from the compound return, an annualized rate.
more

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