All About Book Value Of Equity Per Share

Book Value of Equity Per Share (BVEPS) is the sum each common equity shareholder receives at the time company goes into liquidation. In other words, it is equivalent to firm’s net asset value, i.e. total assets minus total liabilities, on a per-share basis.

Calculation of Book Value of Equity Per Share (BVEPS):

Shareholders of a company are broadly divided into two classes, that is preferred shareholders and common shareholders. Preferred Shareholders are senior to common shareholders and, therefore, are given a priority claim on the company’s assets and earnings over common shareholders.

Step 1: To calculate Book Value of Equity Per Share (BVEPS), investors needs the value of the following two variables:

Common Equity- It refers to the value of the company’s common equity that could be derived by subtracting preferred equity from the total equity. The value of common equity broadly reflects the amount that all common shareholders have invested in the company including retained earnings and additional paid-in capital.

Shares Outstanding- It takes into purview the total number of common shares outstanding as on the date of calculation. But its important to note that shares outstanding of the company are not fixed and may fluctuate over time.

Step 2: The value of common equity is divided by the company’s total number of shares outstanding; the outcome derived therein is known as Book Value of Equity Per Share (BVEPS).

Example: For instance, a company XYZ has a total equity of $600 million that includes the preferred equity of $350 million and has share outstanding of 20 million. Its BVEPS would be:

Common Equity= Total Equity-Preferred Equity

                             = $600 million – $350 million

                             = $250 million

Shares Outstanding (given) = 20 million

Book Value of Equity Per Share (BVEPS)= Common Equity/ Shares Outstanding

                                                                      = $250 million/ 20 million

                                                                      = $12.5 per share

In the same example, if it is provided that the company had a retained earnings of $10 million available to common shareholders, additional paid-up capital of $2 million and has repurchased 2 million shares of stock (buy-back), BVEPS would be calculated as follows:

Common Equity = Total Equity – Preferred Equity + Retained Earnings + Additional Paid-Up Capital

                             = $600 million – $350 million + $10 million + $2 million

                             = $262 million

Shares Outstanding = 20 million – 2 million (buy-back)

                                    = 18 million

Book Value of Equity Per Share (BVEPS)= Common Equity/ Shares Outstanding

                                                                       = $262 million/ 18 million

                                                                       = $14.56 per share

In a way, Book Value of Equity Per Share (BVEPS) represents the value of the company’s equity that is distributed as a residual claim to owners (common equity shareholders) after all the debts have been paid in the event of winding up.

Significance of Book Value of Equity Per Share (BVEPS):

It is widely used metric to evaluate the financial health of the company compared to its on-market valuation. The investors compare the company’s book value of equity per share with its market value per share to determine if the company’s stock price is undervalued or overvalued.

If the shares are overvalued, it somewhere reflects that the company is trading higher than its actual worth; however, book value uses the historical costs of assets and the company’s assets would be sold at fair price/market price, market value is considered a better floor price relative to book value. And further if the company has the potential to generate higher profit, it could eventually use those profits to reduce liabilities or buy more assets which in turn would increase both, the common equity and the book value of the company, reflecting the direct relationship between them.

On the other end, if the shares are undervalued, i.e. market value per share (stock price) is below the firm’s book value of equity per share, it tells that the stock is trading cheap given the actual value of the company’s net assets and revenue prospects. This outlines a significant opportunity in value investing wherein investors could make big profits from buying when the price is deflated and thereby earning stock price gains over time when market realises and reacts to the actual worth and growth prospect of the company, taking the prices to trade at higher levels.

Comparison Between Market Value and Book Value of the company:

The market price is evaluated on the foundation of the present worth of the company’s assets in the market also taking into account its future growth potential and earnings prospective, contrary to the book value approach that relies on historical costs/amortisation costs of assets and liabilities to arrive at company’s net asset value.

However, it is difficult to calculate market price of the company as it requires comprehensive financial modelling to look through the company’s fundaments and its future in the market. The market price keeps on changing at every passing second because of which it is considered more viable for investors to evaluate book value of the company on the basis of its actual reported figures in the balance sheet or periodic statements like quarterly reports.

There could be a lot of factors to defend the relevance of either of the metric. Like one of it includes the relevance of market value when the company is planning to sell some part of its assets or considers mergers or acquisitions in the near time. At that time, market value approach provides more accurate picture of the company’s worth.

To get a better clarity of the concept, one could practice the method of calculating Book Value of Equity Per Share (BVEPS) and its comparison with the market value per share of some famous ASX-listed stocks like Afterpay Touch Group Limited (ASX: APT), Bionomics Limited (ASX: BNO), Crown Resorts Limited (ASX: CWN), Kidman Resources Limited (ASX: KDR) and Bellamy’s Australia Limited (ASX: BAL) among many others.

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Disclaimer

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