Book Value per Share

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Description: Book value per share compares the amount of stockholders' equity to the number of shares outstanding. If the market value per share is lower than the book value per share, then the stock price may be undervalued. Thus, this measure is a possible indicator of the value of a company's stock; it may be factored into a general investigation of what the market price of a share should be, though other factors concerning cash flows, product sales, and so forth should also be considered.

If book value per share is calculated with just common stock in the denominator, then it results in a measure of the amount that a common shareholder would receive upon liquidation of the company.

Formula: Subtract preferred stock from stockholders' equity, and divide by the average number of shares outstanding. Be sure to use the average number of shares, since the period-end amount may incorporate a recent stock buyback or issuance, and will skew the results. The formula is as follows:

Stockholders' Equity - Preferred Stock
Average shares outstanding

Example: ABC International has $15,000,000 of stockholders' equity, $3,000,000 of preferred stock, and and an average of 2,000,000 shares outstanding during the measurement period. The calculation of its book value per share is:

$15,000,000 Stockholders' equity - $3,000,000 Preferred stock
2,000,000 Average shares outstanding

= $6.00 Book value per share

Cautions: The market value per share is a forward-looking measure of what the investment community believes a company's shares are worth; conversely, the book value per share is an accounting measure that is not forward-looking at all. Consequently, it is dangerous to compare the two measures.