 Personal Finance Powerpoint Presentation, book value per share, BVPS. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia, book value per share, BVPS, which you can find online. Take a look at the references, resources, continue your research from there. This by Adam Hayes, updated June 20th, 2022. And prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping in mind, the two major categories, that being the fixed income, typically bonds, and the equities, typically the common stock. Also note your tools, you might be using things like mutual funds and ETFs to help pool the money together and diversify in which case, you might be looking at the market and your investment strategies a little bit different than if you're purchasing individual stocks, for example, in which case, you might be drilling down on the actual financials, doing ratio analysis and trend analysis on the actual stocks themselves, keeping that in mind. What is book value per share, BVPS? Book value per share, BVPS is the ratio of equity available to common shareholders divided by the number of outstanding shares. So note that if we take our good old balance sheet, which basically is the accounting equation, assets equal liabilities plus the equity that we can reshape that using our algebra as assets minus liabilities equals equity. And the reason this is useful is because we are the owners, so we're kind of focused here on the equity, which we can think of as basically the book value of the company. In other words, it's useful to think about a company as if they were gonna go and liquidate, sell all their assets and give all the money to the owners, for example, they would sell their assets, then they'd have to pay off the liabilities to third-party people, and then the rest, in theory, would be going to the owners, in this case, the stockholders. There's multiple stockholders, which we can then think about per unit of stock, but equity in general, you would think of as the value or book value of the company. Now, obviously, if they were to actually liquidate, it wouldn't work out exactly that way because you might have some assets on their book value, they might not be able to sell their equipment for what it's on the books for, or more than what it's on the books for, or whatever. So, but that's kind of the idea, the equity represents kind of like the bottom line, the net asset value of the company. So that's the book value, in essence, of the company, and so now we can break that book value up into units, which are the shares of the company, not the shareholders, because one shareholder could hold multiple shares of the company, but per unit of share. So this figure represents the minimum value of a company's equity and measures the book value of a firm on a per share basis. Understanding book value per share, BVPS, the book value per share metric can be used by investors to gauge whether a stock price is undervalued by comparing it to the firm's market value per share. So clearly, when we look at the book value, we've determined that from the financial statements. The market value is determined by the market. So if they're publicly traded stocks, they're being traded on the market and since they're all the same, we can know what they are trading for and we can do this comparison. If a company's BVPS, which is the book value per share, is higher than the market value per share, its current stock price, what it's selling for, than the stock is considered undervalued. So you would think then that the stock would be trading more than for the book value because you've got the book value and that's really the assets minus the liabilities, meaning if it's really selling just for the book value, you would think that it's basically selling at the price of what the company actually has on the books and you would think it would be over that because you also have the earnings potential. You're hoping that the management in the company is adding the goodwill to the company, added value to the company that will be able to use those net assets to generate revenue. So you would think that if they were selling for the same price that the book value is per share, that the stock might be undervalued. If the firm's BVPS, the book value per share increases, the stock should be perceived as more valuable and the stock price should increase. So in theory, a book value per share is the sum that shareholders would receive in the event that the firm was liquidated, all of the tangible assets were sold and all of the liabilities were paid. Now, obviously we don't want the company to liquidate, we want them to invest in the assets because their assets are what they're gonna use in order to generate revenue. And our goal is to get future revenue generation because that's gonna stimulate growth to us as the owners through this price of the stock and possibly through the dividends that might be distributed in the future. But in theory, if they were to go bankrupt, just the value of the stuff they have on the books, the equipment and all that kind of stuff, they sold it and then paid off the liabilities, the difference is what would be distributed or given to the stockholders. Again, it's not perfect because the book value may differ than what we can actually sell that stuff for. So however, as the assets would be sold at market prices, the book value uses the historical cost of assets, market value is considered a better floor price than a book value for a company. So when you use accounting like terms or for property, plants and equipment, you use depreciated cost instead of the current value of the equipment. And there's various reasons for that. It kind of makes sense to some degree to do that because we don't know what the value of, say, a building is in the future because buildings are unique. You don't really know what the value is until you sell the thing. So it's hard, that's one reason why the book value kind of depreciable cost makes sense for certain types of assets. But in any case, it makes it difficult to know what the actual value would be if you liquidated. So if a company's share price falls below its BV book value per share, a corporate raider could make a risk-free profit by buying the company and liquidating it. So notice that if you're looking at a company that has assets minus liabilities and it's selling for less than you could liquidate it for, the stock is, then you can buy the company and say, I'm not even gonna try to make a profit because I could just buy the company and sell all the assets and pay off the liabilities and I can make money just doing that. So again, you would expect that the value of the stock would be higher than the assets minus the liabilities because the reason the company has those assets minus the liabilities is to generate revenue. They should be, and if they're efficient at doing that, you would expect the market price to be higher than the book value per share. So if book value is negative where a company's liability exceeds its assets, this is known as a balance sheet insolvency. So if they have more liabilities than assets, assets minus liabilities is a negative number. They owe more money than the assets they have. Well then they're not gonna be able to do that for long. They're gonna go insolvent. They're not gonna be able to pay their debts. In other words, they'll probably go into bankruptcy. So the formula for book value per share is the total equity minus the preferred equity divided by the total shares outstanding. So remember the accounting equation is assets equal liabilities plus equity or you can have assets minus liabilities equals equity. Same thing, algebraically, equity then here we got the total equity minus the preferred stock. Now the preferred stock is equity in theory. It's included in the equity section on the balance sheet but it kind of acts like a bond. So if you're talking about the normal shareholders which are common stock shareholders you gotta take out the preferred stock. That's why that's up top divided by the total outstanding shares. Those are the units that are outstanding to get it on a per unit basis. Shareholder's equity is the owner's residual claim to the company after debts have been paid. It is equal to a firm's total assets minus its total liabilities which is the net asset value or book value of the company as a whole. Example of book value per share. Let's take a look at one, shall we? Assume for example that XYZ manufacturing common equity balance is $10 million and that one million shares of common stock are outstanding. This means that the book value per share is 10 million divided by one million shares or $10 per share. So if XYZ can generate higher profits and use those profits to buy more assets or reduce liabilities, the firm's common equity increases. So obviously it changes with the accounting equation. Assets equal liabilities plus equity. So if they were to generate revenue and they bought more assets with it, then the assets minus liabilities would go up. What did I say? Assets minus liabilities equals equity. The assets would go up and so on and that would change the accounting equation. And again, if people start to feel that the company will generate profits in the future, that's when the market price might go up higher than the book value per share because they're seeing that there's value in the company above and beyond the book value of the company in terms of just what they have assets minus liabilities. They have the potential through management, through business to make future revenue. So if for example, the company generates $500,000 in earnings and uses 200,000 of the profits to buy assets, common equity increases along with the book value per share. If the X, Y, Z uses 300,000 of its earnings to reduce liabilities, common equity also increases. Another way to increase the BVPS book value per share is to repurchase common stock from shareholders. So this is kind of a sneakier way to kind of do it because now you're gonna have less of the common stocks out there but that's because the company bought back the common stock. Many companies use earnings buy back shares. So using the X, Y, Z example, assume that the firm repurchases 200,000 shares of the stock and that 800,000 shares remain outstanding. If the common equity is $10 billion, the book value per share increases to 12.5 per share although they might have to spend some money to do that. But in any case, besides stock repurchases, the company can also increase book value per share by taking steps to increase the asset balance and reduce liabilities. Market value per share versus book value per share. While book value per share is calculated using historical costs, the market value per share is a forward looking metric that takes into account a company's future earning power. Now again, the market value is determined by the market. It will in essence be based on the books to some degree but then they're gonna be projecting into the future considering future earning potential as an added factor and added component to figure out the market price. And of course, it will be determined by the market good old supply and demand and increase in a company's potential profitability or expected growth rate should increase the market value per share. For example, a marketing campaign will reduce the book value per share by increasing costs. However, if this builds brand value and the company's able to charge premium prices for its products, its stock price might rise for above the book value per share. Of course, they have to deliver on that if they want it to stay up with the marketing making promises out there, marketing department people. What does book value per share tell you? In theory, the book value per share is the sum that shareholders would receive in the event that the firm was a liquidated, all of the tangible assets were sold and all of the liabilities were paid. However, its value lies in the fact that investors use it to gauge whether a stock price is undervalued by comparing it to the firms of market value per share. If a company's book value per share is higher than its market value per share, which is its current stock price, then the stock is considered undervalued. How can companies increase book value per share? A company can use a portion of its earnings to buy assets that would increase common equity along with the book value per share, or it could use its earnings to reduce liabilities so it can pay down the liabilities, which would also result in an increase in its common equity and book value per share. You could just do the math and the accounting equation if you wanted to check that out and prove it to yourself and think through it. But in any case, another way to increase the book value per share is to repurchase common stock from shareholders, so now you're gonna decrease the number of shares out there, and many companies use earnings to buy back shares. How does book value per share differ from market value per share? Well, book value per share is calculated using historical costs, the market value per shares, a forward-looking metric that takes into account a company's future earning power, an increase in a company's potential profitability or expected growth rate should increase the market value per share. Essentially, the market price per share is the current price of a single share and a publicly traded stock. Unlike the book value per share, market price per share is not fixed as it fluctuates based solely on market forces of supply and demand.