Formula to Calculate Book Value of a Company
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.
It 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)Book Value Per Share (BVPS)The book value per share (BVPS) formula evaluates the actual value of the common equity for each outstanding share, excluding the preferred stock value. A higher BVPS compared to the market value per share indicates an overvaluation of stocks and vice-versa.read more can be computed based upon the equity of the common shareholders in the company.
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For eg:
Source: Book Value Formula (wallstreetmojo.com)
How to Calculate Book Value?
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 dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more 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 stockOutstanding Common StockOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more. The reason for deducting preferred stock from the common equity shareholdersEquity ShareholdersShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.read more 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
Example #1
Common Equity ltd reports below the number at the closure of its annual books of account. You are required to compute BVPS.
Solution:
First, we need to find out shareholders equity which is a difference of Total Assets and LiabilitiesDifference Of Total Assets And LiabilitiesWhat makes Assets & Liabilities different is that while the former refers to anything that a Company owns to gain long-term economic benefits, the latter refers to anything that the Company owes to other parties. read more which is 53,500,850.89 – 35,689,770.62 = 17,811,080.27
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 –
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 of is SBI share is 308.
NOTE: Use the BVPS formula and then divide the 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
Therefore, the calculation of book value per share will be as follows,
BVPS = Total Common Shareholders Equity – Preferred Stock / Number of Outstanding Common Shares
= 2,05,473.96 cr/ 892.54 cr
BVPS will be –
P/BVPS will be –
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 chains 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 the first book value of Reliance in order to know what impact Hamleys could 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.
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 Calculator
You can use this book Value 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 two core uses:
- It shall serve as the total value of the assets of the firm or of the company that stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.read more 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 essential 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.
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