Book Value formula calculates the net asset of the company derived by total of assets minus the total liabilities. Alternatively, Book Value can be calculated as the sum total of the overall Shareholder Equity of the company.
The Formula of Book Value (Table of Contents)
What is Book Value Formula?
Book value can be defined as the net asset value of the firm or of the company that can be calculated as total assets less intangible assets (that is goodwill, patents etc.) and liabilities. Further, Book Value Per Share (BVPS) can be computed based upon the equity of the common shareholders in the company.
The Formula for Book Value Ratio is represented as below,
Explanation of the Book Value Formula
The formula states that the numerator part is what the firm receives by the issuance of common equity and that figure increases or decreases depending upon the company is making profit or loss and then finally it decreases by issuing dividend and preference stock.
The 1st part will be to find out the equity which is available to its common shareholders. One can question as to why we’re deducting the preferred stock in the above formula for computing book value per share and average outstanding common stock. The reason for deducting preferred stock from the common equity shareholders is that preferred shareholders are paid before common shareholders but only after the companies’ debts are being cleared off in total.
Book Value for the Firm = Shareholders Common Equity – Preference Stock
And on the other hand
Shareholder’s common equity = Total Assets – Total Liabilities.
The 2nd part is to divide the shareholders’ common equity which is available to the equity shareholders by the outstanding number of common equity shares.
Examples of Book Value Formula (with Excel Template)
Let’s see some simple to advanced examples of book value to understand it better.
Example #1
Common Equity ltd reports below the number at the closure of its annual books of account. You are required to compute BVPS.
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Solution:
First, we need to find out shareholders equity which is a difference of Total Assets and Liabilities which is 53,500,850.89 – 35,689,770.62 = 17,811,080.27
Now, we can use below formula to calculate BVPS
Therefore, the calculation of book value per share is as follows,
BVPS = Total Common shareholders equity – Preferred Stock / Number of outstanding common shares
= 17,811,080.27 /8,500,000.00
BVPS will be –
BVPS = 2.0954
Example #2 – (SBI BANK)
SBI is one of the leading lenders in India. Vivek an equity analyst wants to consider SBI in its portfolio. Suresh who recently joined as an intern under Vivek and is carrying a passion for research. Vivek asks him to compute P/BVPS for SBI and then do a peer to peer comparison. The Price is SBI share is 308.
NOTE: Use the BVPS formula and then divide Price by this result.
Solution:
First, we need to find out shareholders equity which is difference of Total Assets and Liabilities (borrowings + other liabilities) which is 36,16,433.00 – (30,91,257.62 + 3,19,701.42) = 2,05,473.96 cr
Now, we can use below formula to calculate BVPS
Therefore, the calculation of book value per share will be as follows,
BVPS Formula = Total Common Shareholders Equity – Preferred Stock / Number of Outstanding Common Shares
= 2,05,473.96 cr/ 892.54 cr
BVPS will be –
BVPS = 230.21
P/BVPS will be –
= 308 / 230.21
P/BVPS = 1.34
Example #3
Shruti has invested all around these years in reliance industries and now after taking over of Hamleys one of the leading toy store chain and she is curious as to what was the purpose behind it. She anticipates that this could reduce the value of Reliance as its completed unrelated and unanticipated activity that Reliance has done.
Below is the extract from Reliance industries for March 2018 and she wants to calculate first book value of reliance in order to know what impact could Hamleys create?
Solution
First, we need to find out shareholders equity which is difference of Total Assets and Liabilities (borrowings + other liabilities) which is 8,23,907.00 – (2,39,843.00 + 2,90,573.00) = 2,93,491 cr
Also, we can add Equity Share capital and Reserves to get shareholders equity which is 5,922 cr + 2,87,569 cr which will sum to 2,93,491 cr.
Now, we can use below formula to compute BVPS
Therefore, the calculation of book value per share will be as follows,
BVPS= Total Common shareholders equity – Preferred Stock/Number of outstanding common shares
= 2,93,491.00 cr /592.18 cr
Book Value Per Share will be –
BVPS= 495.61
Book Value Formula Calculator
You can use this book Value formula calculator
| Total Common Shareholders Equity | |
| Preferred Stock | |
| Number of Outstanding Common Shares | |
| Book Value Ratio | |
| Number of Outstanding Common Shares = |
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Relevance and Uses
As the accounting value of a company, book value can have 2 core uses:
- It shall serve as the total value of the assets of the firm or of the company that stockholders would theoretically receive if the firm or the company were to be liquidated.
- When a comparison is performed to the company’s market value or market price, book value can be a good indicator to equity analyst whether the price of the stock is overpriced – or underpriced.
Hence, it is important for the investor to have looked upon both the book value or the book price of the company as well as the market price of the stock and then decide the worthiness of the company.
Recommended Articles
This has been a guide to Book Value Formula. Here we learn how to calculate book value ratio formula along with practical industry examples and downloadable excel template. You can learn more about financial analysis from the following articles –
