Savvy investors in stock markets are always on the lookout for stocks that are not fully valued or, still better, are grossly undervalued.
An important measure to gauge the value of stocks is the book value per share.
In this blog, I will explain to you everything related to the book value per share.
Book value per share (BVPS) indicates the accounting value of each share of stock of any listed company. It represents a per share assessment of the minimum value of a company’s equity.
It is calculated as the equity available to common shareholders divided by the number of outstanding shares.
Formula of BVPS
BVPS = (Total Shareholders’ Equity – Preferred Equity) / Total Outstanding Common Shares
Book value per share is calculated by totaling the company’s assets, subtracting all debt, liabilities, and the liquidation price of preferred stock, then dividing the result by the number of outstanding shares of common stock.
Example of BVPS
Let’s say company XYZ has Rs. 100 crore worth of total assets and Rs. 60 crore worth of total liabilities as per their accounts.
Suppose the company XYZ being sold off today and will only be paid for the assets at the value in its accounts and no premium.
They sell off their assets and get Rs. 100 crore. They use this Rs. 100 to pay off their total liabilities of Rs. 60.
Thus they are left with Rs. (100-60) = Rs. 40 crore which is the book value. This is completely available to the shareholders.
And, when you divide Rs. 40 crore (the book value) with the number of outstanding shares you will get the book value per share.
If the total number of outstanding shareholders is 10 crore.
BVPS = 40 crore / 10 crore
= Rs. 4
Therefore, the Book Value Per Share is Rs. 4.
Significance of BVPS
BVPS metric can be used by investors to gauge whether a stock price is undervalued, by comparing it to the company’s market value per share.
If a company’s BVPS is higher than its current stock price, then the stock is considered undervalued.
If the company’s BVPS increases, the stock should be perceived as more valuable, and the stock’s market price should increase.
If BVPS is negative, where a company’s total liabilities exceed its total assets, this is known as a balance sheet insolvency.
But does this in itself make the stock a good investment option?
According to financial analysts, the price-to-book value just indicates whether the stock is undervalued or overvalued, and has to be seen with other factors such as the company’s earnings record.
However, for most investors especially the new ones, it is a good starting point to look for undervalued stocks in the market.
Why Some Stocks Trade Below its Book Value?
A stock may trade below its book value for mainly two reasons:
- Lack of investor confidence in the company’s future. If it is widely believed that the company’s performance will deteriorate in coming times, its stock will possibly trade at a discount to its book value.
- If the company is adopting aggressive accounting policies to overinflated its net worth.
Stocks Trading Below its Book Value
Some of the noted Indian companies whose stocks trade below its BVPS are as follows:
|Company||Market Price||Book Value|
|Reliance Infrastructure Ltd.||114.5||254.25|
|Electrosteel Castings Ltd.||19||61.25|
|Reliance Power Ltd.||8.11||83.03|
|Eon Electric Ltd.||36.45||73.23|
|Arihant Foundations & Housing Ltd.||26||174.82|
|Hindustan Media Ventures Ltd.||105.05||181.45|
|Eros International Media Ltd.||71.75||266.19|
|Oriental Bank Of Commerce||103.45||24.83|
The Bottom Line
Book value per share should not be seen in isolation for selecting stocks.
Don’t buy a stock just because it is trading below its book value. Do some more research and find out what’s going on with the company.
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