Book value per share of common stock

What is book value per share?

Book value per share of common stock is the amount of net assets that each share of common stock represents. Since the number of shares owned by a stockholder determines his or her portion of equity in a corporation, some stockholders have keen interest in knowing the book value of stock they own. In this article, we will explain how this value is calculated in different capital structures.

Formula and calculation:

Mostly, the book value is calculated for common stock only. The presence of preferred stock in the total stockholders equity, however, has a significant impact on the calculation. The formulas and examples for calculating book value per share with and without preferred stock are given below:

(1). If company has issued only common stock and no preferred stock:

The calculation of book value is very simple if company has issued only common stock. The net assets (i.e, total assets less total liabilities) can be divided by the number of shares of common stock outstanding for the period.

We know that:

Net assets = Assets – Liabilities
Or
Equity = Assets – Liabilities
Or
Net assets = Equity

Keeping in view the above relationship between assets, liabilities and owners’ equity, an alternative and equally acceptable approach is to replace the numerator of the formula by stockholders’ equity. After this modification, we get the following extensively used formula for the calculation of book value per share:

 Example:

Calculate book value per share from the following stockholders’ equity section of a company:

Solution:

= $1,776,000/100,000 shares
= $17.76 per share of common stock

(2). If company has issued common as well as preferred stock:

If a company has issued common as well as preferred stock, the amount of preferred stock and any dividends in arrears thereon are deducted from the total stockholders equity, the resulting figure is divided by the number of shares of common stock outstanding for the period. This procedure can be summed up in the form of the following formula:

Example:

Calculate book value per share from the following stockholders’ equity section of a company:

The preferred stock shown above in the stockholders’ equity section is cumulative and dividends amounting to $48,000 are in arrear.

Solution:

= [$2,576,000 – ($800,000 + $48,000)]/100,000 Shares
= $1,728,000/100,000 Shares
= $17.28 per share of common stock

Book value and market price relationship

The book value per share number may help investors evaluate the reasonableness of the market price of a company’s stock. However, potential investors must be careful while using it in their stock analysis and investment decisions, because buying a stock at a price lower than its book value may not always be a good deal.

Book value is based on historical information which represents stockholders’ investment and the amount retained by the corporation out of its profits. If a stock’s market price is higher than its book value, it means investors assume that the corporation’s management has developed a business worth more than its assets’ historical cost. This indicates that the business is moving towards betterment and expected to prosper overtime. On the other hand, if a stock is selling at a price below its book value, the investors assume that the entity’s resources are worth less than their cost while they are being managed by the current management team. Hence, the relationship between book value and market price of a stock can be a measure of investors’ trust in the overall management of a business entity.