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Sunday, 24 July 2016

Book Value per Share

Book Value per Share
The book value per share formula is used to calculate the per share value of a company based on its equity available to common shareholders. The term "book value" is a company's assets minus its liabilities and is sometimes referred to as stockholder's equity, owner's equity, shareholder's equity, or simply equity.
Common stockholder's equity, or owner's equity, can be found on the balance sheet for the company. In the absense of preferred shares, the total stockholder's equity is used.

Concept of Book Value per Share

Book value per share is just one of the methods for comparison in valuing of a company. Enterprise value, or firm value, market value, market capitalization, and other methods may be used in different circumstances or compared to one another for contrast. For example, enterprise value would look at the market value of the company's equity plus its debt, whereas book value per share only looks at the equity on the balance sheet. Conceptually, book value per share is similar to net worth, meaning it is assets minus debt, and may be looked at as though what would occur if operations were to cease. One must consider that the balance sheet may not reflect with certain accuracy, what would actually occur if a company did sell all of their assets.

Use of Book Value per Share

The book value per share may be used by some investors to determine the equity in a company relative to the market value of the company, which is the price of its stock. For example, a company that is currently trading for $20 but has a book value of $10 is selling at twice its equity. This example is referred to as price to book value (P/B), in which book value per share is used in the denominator. In contrast to book value, the market price reflects the future growth potential of the company.
Book value per share is also used in the return on equity formula, or ROE formula, when calculating on a per share basis. ROE is net income divided by stockholder's equity. Net income on a per share basis is referred to as EPS, or earnings per share. As shown at the top of this page, book value per share is expressing stockholder's equity on a per share basis.

6 comments:

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