Book value per share is simply the number that we get when we divide the company book value (also know as equity) by the number of outstanding shares that the company has in total. Book value or equity is the company total assets minus the total liabilities. The equity can be found on a company’s balance sheet and it is one of the most common financial metrics used by investors to assess the financial health of a company. Book value per share is simply the equity of the company divided by the number of shares and it is useful as it gives us the value in a per share format that makes it more intuitive to compare it with the price of the stock of the company.
Calculating the book value per share is very simple, all we need to know is the Book value of a company and the total number of common outstanding shares of the company. Formula:
Book Value per Share = Shareholders’ Equity ÷ Number of Common Outstanding Shares
The Book value or Equity can be found on the balance sheet of the company financial reports. Shares outstanding refers to all shares currently owned by stockholders, company officials, and investors in the public domain, but does not include shares repurchased by a company.The number of shares outstanding is also listed on a company’s balance sheet usually under the name “Capital Stock”. We base the calculation on the common stockholders’ equity, and therefore the preferred stock should be excluded from the value of equity. This is because preferred stockholders are ranked higher than common stockholders during liquidation and the Book Value per share represents the value of equity that remains after paying up all debts and the company’s assets liquidated.
The only difference between book value per share and Book value or Equity is that the formal is represented in a per share basis. The benefits of this is that it is more intuitive when comparing the equity of the company with the share price of the company.
For example, a company that has a stock price of $50 but has a book value per share of $25 is selling at twice its equity value. The per share value of equity is also used in the price to book value (P/B) ratio, in which book value per share is used in the denominator. It is important to notice that book value number does not reflects the future growth potential of the company.
When compared to the current market value per share, the book value per share can provide information on how a company’s stock is valued. If the value of Book Value per share exceeds the market value per share, the company’s stock can be considered as undervalued (at least on an asset/equity basis).