Book value per share

The formula

• BVPS = E / n

E is the shareholders’ equity, the assets at book value less all the liabilities, and n the number of shares outstanding. Each share’s slice of what would be left after the debts were paid.

A worked example

Equity of 50,000,000 and 2,000,000 shares: BVPS = 50,000,000 / 2,000,000 = 25. Turned round, a company with 2,000,000 shares and a book value of 25 a share has equity of 50,000,000.

Price-to-book

The share price divided by the book value per share is the price-to-book ratio: a share at 120 with a book value of 25 trades at 4.8 times book. Below 1 the market values the company at less than its own accounts do, which can be a bargain or a judgment on the accounts. The Graham number caps the price at 1.5 times book, among other things.

When book value says little

The book value counts what the accounts count: buildings, machines, stock, cash, less debt. It leaves out, or carries at a nominal figure, the things that make many companies valuable: brands, software written in-house, customer relationships, people. A consultancy or a software company can have a book value near zero and a large market capitalisation, and the ratio between them says more about the industry than about the price.

Common mistakes

• Using total assets instead of equity. The debts have to come off first.
• Dividing by the shares authorised. Only shares outstanding count.
• Reading book value as liquidation value. Assets sold in a hurry rarely fetch their book value, and the liabilities are exact.

Frequently asked questions