What Is the Book Value Per Share?

Avoid Confusing Book Value With Market Value

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"Book value" represents a company's assets minus its liabilities and sometimes is referred to as stockholder's equity, owner's equity, shareholder's equity, or simply equity. The book value per share formula is used to calculate the per share value of a company based on its equity available to common shareholders.

Book value per share is a market value financial ratio, and the purpose of calculating it is to relate shareholders' equity to the number of shares of common stock outstanding.

The number of shares of preferred stock is not considered, giving this a more "real" value to the common shares outstanding.

Calculating Book Value Per Share

Here is the calculation of the book value per share:

Book Value Per Share = Shareholders Equity ÷ Average Number of Common Shares

It's important to use the average number of outstanding shares in this calculation as a period-ending amount might be based on a short-term event such as a stock buy-back, which would influence results and diminish their reliability.

Interpreting Book Value Per Share

This measurement is used by investors to evaluate the price of a company's common stock. For instance, if the market value per share is lower than the book value per share, then the stock price may be undervalued. 

However, book value is not market value. The book value of owners’ equity is not directly tied to the market value of a business and is essentially an accounting value, subject to management discretion in accounting policies.

Book value may be considered in varying degree in putting a market value on a business and its ownership shares.

There are interesting ways to look at book value. If market value is much higher than book value, the financial markets are likely experiencing a bull market. If the values are closer together, the financial markets may be in a bear market.

A Practical Example

Fictional Company A has $20,000,000 worth of stockholders equity, $5,000,000 worth of preferred stock, and an average of 5,000,000 shares outstanding. The calculation of its book value per share is:

($20,000,000 [Stockholders Equity] - $5,000,000 [Preferred Stock]) ÷ 5,000,000 [Average Number of Common Shares] = a book value per share of $3.

Two Considerations

There are two issues to consider:

  1. The market value per share is a forward-looking measure of what a company's shares are worth; conversely, the book value per share is an accounting measure that is not forward-looking. The two measures are completely different and are based on different information.
  2. Some assets tend to be undervalued in the book value concept, sometimes considerably, because it is not easy to put a cash value on them. Brand and reputation, for example, may take years to nurture. In-house proprietary research and development can be extremely valuable, but in this calculation may be seen only as an expense. Patents, goodwill and intellectual property also fall into this category. These factors can contribute to the disparity between book value and market value.