30 Mar 2018

Book value per share

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CA Abhishek Sinha
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CA in Practice
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Book value per share compares the amount of stockholders' equity to the number of shares outstanding. If the market value per share is lower than the book value per share, then the stock price may be undervalued. Thus, this measure is a possible indicator of the value of a company's stock; it may be factored into a general investigation of what the market price of a share should be, though other factors concerning cash flows, product sales, and so forth should also be considered. The measurement is rarely used internally; instead, it is used by investors who are evaluating the price of a company's stock.

If book value per share is calculated with just common stock in the denominator, then it results in a measure of the amount that a common shareholder would receive upon liquidation of the company.

The formula for book value per share is to subtract preferred stock from stockholders' equity, and divide by the average number of shares outstanding. Be sure to use the average number of shares, since the period-end amount may incorporate a recent stock buyback or issuance, which will skew the results. The formula is as follows:
(Stockholders' Equity - Preferred Stock) ÷ Average shares outstanding

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