When it comes to evaluating a company in its raw picture, one usually looks at the difference between the company’s total assets and its total liabilities. This difference tells us the Book Value of that company. Now dividing the same value with the total number of outstanding shares gives us Book Value Per Share, which is one of the most important metrics that stock investors use to pick up a quality share for their portfolio. What is Book Value Per Share meaning and what impact does it has stock investing? This article covers the same.
Book Value Per Share: Meaning and Calculation
Many investors look out for stocks that are not fully valued or undervalued. This they do in order to buy the quality stocks when they are undervalued and wait for the time to sell the stock when its value increases in order to earn profits. Book Value Per Share, in this case, is an important metric to gauge the stock’s value and decide whether it is undervalued or overvalued. BVPS shows the raw picture of any stock in terms of its valuation.
BVPS is an extremely important metric used in a stock’s fundamental analysis.
The Book Value Per Share of a stock is calculated using the following formula:
BVPS = (Total equities held by shareholders – Total preferred equities) / Total number of outstanding shares
The same can be rewritten and (Net value of all assets of the company – Net total liabilities) / Total number of outstanding shares
Let us understand the same with an example,
Suppose a company X has a net asset value of Rs 100 crores and total liabilities of Rs 30 crores. Now the company is getting sold off for some reason. However, the buyer of the company will only be buying the total assets and without covering up the liabilities. Company X’s board will now have Rs 100 crores from the sell off, out of which Rs 30 crores will be used to clear off the liabilities. The remaining Rs 70 crores will be available to the shareholders. This is also the company’s Book Value.
Now suppose, the company has 70 lakhs outstanding shares, so the Book Value Per Share will be (70 crores / 70 lakhs) = Rs 100.
Impact of Book Value Per Share on Stock Investing
As said, BVPS is an important parameter to gauge the real value of any stock. This is used by many investors to choose stocks that can generate good returns. Book Value Per Share has a number of impacts on stock investing. Let us discuss those in detail.
Helps Investors Decide When to Buy a Stock
Investors in the share market are always interested in finding out stocks that are trading lower than their real worth, which means the stocks whose market price is less than their BVPS. When this is the case, it is likely that the particular stock’s price will increase in the future and can churn good returns for the investor.
Which Stocks to Avoid
When a stock is trading well above its BVPS then it is generally considered overvalued and there is a chance that the price might cool down or decrease in the future. Investors generally try to avoid such stocks and wait for the price to come down if they have those on their wishlist.
Evaluate Company’s Position
Since Book Value Per Share shows the real worth of a company (net assets over its liabilities), it helps investors to judge the company’s future performance. If the company’s BVPS increases, its stock is usually perceived as more valuable. Similarly, when the company’s BVPS is negative, it means that the company has more liabilities than assets, which is also known as balance sheet insolvency, the stock is considered as a poor performer.
In Case of Company’s Insolvency
Book Value Per Share is actually the value of each of the outstanding shares in case of the company’s insolvency. Hence, if someone is planning to invest in a stock just in order to keep receiving dividends in the long term, he/she should check the company’s BVPS before making any investment. This will ensure that even if the company gets sold off all of a sudden, the investor will receive atleast this much from his investment.
Used With Other Metrics
BVPS, when used with other fundamental metrics can prove to be extremely helpful in picking up quality stocks. Although BVPS shows the true value of a company’s stock, it nevertheless, cannot be the ultimate measure of evaluating a stock’s performance. This is why investors combine BVPS with other performance metrics as well and then choose the stocks for their portfolio.
So these are some important things to know how BVPS impacts investing in the stock market and also helps investors in a number of ways. BVPS is a strong tool to gauge a company’s and its stock’s real value and take investment decisions accordingly. Also, when used with other fundamental metrics, Book Value Per Share can play a decisive role in giving you high quality stocks that can deliver good returns easily.
