Book value per share (BVPS)
Book value per share formula
If you are thinking to invest in any company, you should calculate book value per share to determine the fair value of the stock. Here, is the complete guide of book value per share. Keep reading and happy investing!
What is Book value per share?
Book value per share is one of the financial ratios that assist the investor to get in-depth knowledge of the value of the stock. After knowing the book value, the investor is in a better position to evaluate the current value of the stock and predict its future worth.
It is calculated by dividing equity available for the shareholders (common) by the total number of outstanding shares. It is also denoted as BVPS.
What is a good book value per share?
There is not any measure of good book value per share because good book value per share differs from industry to industry.
For some industries, it can be any value under 1 and for others, it can be 2. Therefore, it depends on the performance of the industry.
It is better to invest in the stock that has the lowest book value per share (undervalued stock) and has the potential to grow in the future. Usually, book value per share is used to calculate the price-to-book ratio. It is one of the market valuation ratios. The price-to-book ratio is calculated by dividing the market price per share by book value per share.
Usually, book value per share is used to calculate the price-to-book ratio. It is one of the market valuation ratios. The price-to-book ratio is calculated by dividing the market price per share by book value per share.
How to use book value per share?
The book value per share is the current value of the share. As an investor, one should study the historical patterns of the book value per share of the company. It helps to determine the company’s performance of the stock.
If the fair value is lower than the market value of the share then the stock is undervalued. In this case, the investor should purchase the share perceiving the value of the stock would increase in the future.
Moreover, the book value per share is the sum that the investor would receive in case of liquidation of the company.
What does it mean by a lower share price than the book value per share(High book value per share)?
When the book value per share is higher than the market value per share, the company share is undervalued.
It is better to buy the stock when it is undervalued.
What does it mean by a higher share price than the book value per share(Lower book value per share)?
If the trading price of the shares is higher than the book value per share of the company may indicate that the stock is overvalued.
What does it mean by a negative book value per share?
If the book value per share is negative of any company, it means, there is insolvency in the balance sheet. The company has or nearly to bankrupt.
Conclusion
The book value per share enables the investor/ analyst to better evaluate the stocks. Further, this ratio effectively indicates the per-share value of the net assets of the company. Accordingly, the investor gets the edge to make an investing strategy.
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