Introduction

When the stock price is contrasted with the company's book value per share (BVPS), an undervalued stock price can be found. Investors view stock as cheap if its book value per share (BVPS) is more significant than its current share price. Investors should value the stock more highly and drive its price if the company's BVPS increases. Here you’ll learn about Book Value Per Share (BVPS).

The book value per share (BVPS) is the sum shareholders would get if the company was dissolved, all tangible assets were sold, and all liabilities were paid (BVPS). Market value is frequently thought of as a better floor price for a corporation because the assets would be sold at market values as opposed to the book value, which accounts for the historical costs of the assets.

Example of Book Value Per Share

For the argument, assume that XYZ Manufacturing has a $10 million equity balance and that there are outstanding 1,000,000 shares of common stock. Since $10 million is divided by 1,000,000 shares, the BVPS is $10 per share. The company's common stock rises if XYZ can increase profits and use those revenues to acquire more assets or pay off debt. For instance, shared equity and BVPS will increase if a company earns $500,000 and invests $200,000 in fixed assets. For XYZ, a rise in common equity would result from using $300,000 in earnings to pay down debt.

Another strategy to raise BVPS is to repurchase stock from investors. Profits have been used to repurchase the stock of several companies. Continuing with the XYZ example, suppose the business buys back 200,000 shares of stock, leaving 800,000 in circulation. If the total equity is $10 million, the BVPS increases to $12.50 per share. In addition to stock repurchases, a company can increase its BVPS by boosting its asset balance and lowering its liability ratio.

How to Increase the Book Value Per Share

A company could increase its book value per share in two ways:

Repurchase Common Stocks

Buying shares directly from shareholders is one of the best ways to raise each share's book value. The corporation has decided to repurchase 500,000 of its common shares from the stock market, thus continuing the example from earlier, let's say that. As a result, outstanding shares will decrease from 3 million to 2.5 million (3,000,000 – 500,000). The revised BVPS will appear as follows:

BVPS = $15,000,000 / 2,500,000

BVPS = $6

The BVPS increases from $5 to $6 with the repurchase of 500,000 shares of common stock from shareholders.

Increase Assets And Reduce Liabilities

They are reinvesting profits into the company, whether by purchasing new assets or reducing existing obligations, which can help companies raise their book value per share. As an illustration, if ABC Limited generates an annual profit of $1,000,000 and invests $300,000 in new firm assets, the effect will be a growth in common equity and, consequently, a greater BVPS. The result will be comparable if the business invests $200,000 in profits to lower debt and raise equity available to ordinary investors.

Market Value Per Share vs. Book Value Per Share

One can estimate the stock's value by contrasting a company's book value and market value per share. The price at which buyers and sellers can agree on a particular stock is known as a company's stock market value. The probability of future profits is considered when determining a company's market value. The market value of each share will rise as the business grows and becomes more lucrative.

A cost-based measure in accounting is book value per share. The statistic does not account for future performance and does not accurately reflect the actual market value of a company's stock. The BVPS estimates how much cash stockholders would have in their accounts following a company's liquidation and settlement of all debts. The BVPS appeals to value investors in situations where future growth and earnings are uncertain.

Drawbacks of Book Value Per Share

Since book value per share only considers book value and overlooks other vital factors that can affect the price of a company's share, it has limitations as a valuation method. Intangible factors impact a company's shares, but they are not considered in the BVPS calculation.

Conclusion

All of the firm's assets would be sold, its debts would be settled, and any remaining funds would be given to the shareholders if the company was liquidated. By contrasting it to the market value per share of the company, investors can decide if a stock price is overvalued or undervalued. A stock is considered cheap if its book value per share (BVPS) is higher than its current share price.