Definition
Book Value Per Common Share is a company’s financial measure, calculated by dividing total common stockholder’s equity, excluding preferred equity, by the total number of outstanding common shares. This measure evaluates the net asset value of a company on a per-share basis, indicating the minimum value of a company’s equity. It helps investors understand what they would get if the company were to liquidate all its assets and repay liabilities.
Phonetic
The phonetics of the keyword “Book Value Per Common Share” are:Book: /bʊk/ Value: /ˈvæl.juː/Per: /pər/Common: /ˈkɒm.ən/Share: /ʃeər/
Key Takeaways
- Meaning: Book Value Per Common Share (BVPS) is a financial metric used to evaluate a firm’s market value relative to its book value. It’s determined by dividing a company’s total book value by the total number of outstanding common shares.
- Importance: BVPS can be a helpful tool for investors to understand a company’s equity situation and compare it with others in the industry. If the number is lower, it may indicate that a company’s stock is undervalued, making it an attractive target for potential investors.
- Limited Scope: BVPS should not be the sole metric used to represent a company’s worth. It’s important to note it doesn’t account for future earnings or cash flows, intangible assets, or potential market conditions. Therefore, a more comprehensive evaluation should be done to fully understand a company’s value.
Importance
The business/finance term “Book Value Per Common Share” is critical because it provides investors with a measure of the value of a company’s common share if it were to be liquidated, often serving as a safety-net evaluation tool. It’s calculated by subtracting a company’s total liabilities from its total assets, then dividing this figure by the number of common shares outstanding. By offering a tangible, per-share valuation, it allows shareholders to gauge the underlying asset value of their investment. Moreover, comparisons of a company’s book value per common share over time can help identify trends, enabling stakeholders to make informed decisions about buying, selling, or holding the stock. It is especially useful when comparing companies within the same industry.
Explanation
Book Value Per Common Share (BVPS) serves as a key metric in understanding a company’s financial health. It represents the amount of worth that would hypothetically be available to shareholders if a company were to liquidate all its assets and settle all its debts. BVPS provides investors and analysts a baseline value for a share of a company’s common stock, helping determine if these shares are undervalued or overvalued. Apart from stock valuation, BVPS becomes a valuable measure in analyzing a company’s financial efficiency and profitability per unit of shareholder equity. This indicator helps investors take a more in-depth look at the company, not just its current market value but also its tangible, intrinsic value, providing a clearer comparison point with its competitors. Hence, BVPS gives vital insights to inform investment decisions, and helps investors make more informed, profitable decisions.
Examples
1. Apple Inc.: At the end of 2021, Apple reported a total shareholders’ equity of $105.416 billion. With a reported common outstanding shares of 16.77 billion, the book value per share was around $6.29 (105.416 billion / 16.77 billion). This value represents the amount that each shareholder would theoretically receive if Apple were to liquidate all its assets and pay off its liabilities.2. Johnson & Johnson: As of 2021, Johnson & Johnson (JNJ) had a shareholders’ equity of $80.89 billion with total outstanding shares of 2.653 billion. The book value per share was thus about $30.5 (80.89 billion / 2.653 billion). If JNJ were to go bankrupt and sell off its assets, each common share would be entitled to an amount close to this figure in theory.3. Microsoft Corporation: As of 2021, Microsoft had a reported shareholders’ equity of $141.54 billion. If we divide this number by the total outstanding shares of 7.51 billion, we get a book value per share of nearly $18.84. This is the theoretical amount, in dollars, that each common share would be worth if Microsoft were to liquidate today and pay off all its liabilities.
Frequently Asked Questions(FAQ)
What is Book Value Per Common Share?
Book Value Per Common Share is a measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid. It is calculated by subtracting liabilities from total assets, and then dividing this by the total number of currently outstanding shares.
How do you calculate Book Value Per Common Share?
Book Value Per Common Share is calculated by taking the company’s total assets minus total liabilities (also known as shareholder equity) and dividing it by the total number of shares currently outstanding.
How is Book Value Per Common Share significant in financial analysis?
It’s an important tool used to evaluate a company’s net asset value, in terms of how much assets shareholders would receive if the business was liquidated. It can also indicate whether a company’s shares are overpriced or underpriced in the market.
Does a higher Book Value Per Common Share mean a company is doing well?
A higher Book Value Per Common Share is not necessarily a sign that a company is performing well. It could mean the company has significant assets, but it does not indicate how those assets are being used to generate profits. A combination of metrics should be used for a comprehensive understanding.
How often is Book Value Per Common Share calculated?
This is typically calculated at the end of each financial quarter, after a company closes its books, and is reported in the company’s quarterly financial statements.
Can Book Value Per Common Share be negative?
Yes, the book value per share can be negative if a company’s liabilities exceed its assets. This could potentially be a red flag that financial trouble is looming.
Why is Book Value Per Common Share different from market value per share?
Book value per common share is based on the value of assets that a company owns, while the market value per share is how much the shares are selling for on the stock market. The two numbers can be quite different, especially if investors believe the company has significant growth potential in the future.
Related Finance Terms
- Balance Sheet: A financial statement that reports a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
- Total Shareholders’ Equity: The residual interest in the assets of an entity after deducting liabilities.
- Common Stock: A type of securities representing ownership in a corporation, which have rights to a company’s assets and earnings.
- Financial Ratio Analysis: The process of understanding the risk and profitability of a firm through analysis of reported financial information, particularly annual and quarterly reports.
- Tangible Asset: An asset that has a physical form, such as machinery, buildings, and land. These are often used in the calculation of book value.
