Finance Definitions: Book Value per Share

As we delve deeper into investing terms, we come across the book value per share. This ratio is listed on stock ratio sheets, and it is an important term to know. However, the book value per share is not one of the most integral ratios for investors to consider. Instead, it is often used within a company to determine the health and safety of the company, as determined on a per share basis. Even so, let’s take a look at this ratio definition.

What is Book Value per Share?

The book value per share measures the total amount of money a shareholder would receive if the company were to go under. It is calculated by dividing the shares into the company’s equity after the dissolution of the company assets and liabilities. So, basically, the calculation determines how much money per share would be left over for the shareholders after the company sold their assets and paid off liabilities.

Use of Book Value per Share within a Company

While many companies can use the book value per share to judge the business’ health, it is most useful in industries with liquid assets or hard assets as compared to intellectual assets. So, for example, the book value per share is helpful to liquid asset companies like banks and to hard asset companies like manufacturing companies. It is less helpful to industries in which intellectual property is valued highly, like patent companies.

The banks and manufacturing companies, though, can calculate their book value per share to determine the company’s health. In general, each industry will aim for a book value per share higher than the share value. This indicates that the company is growing and generating profits.

Use of Book Value per Share on the Stock Market

Generally, the book value per share is used little in analyzing stocks, but there is one circumstance in which the ratio may be helpful. When a company is potentially undervalued, like when the price/book ratio is low, looking at the book value per share may be helpful in determining whether or not the company truly is undervalued. In the case of an undervalued company, the book value per share will most likely be high, and the stock opportunity may be stellar (and one to take advantage of!). Of course, other factors should be considered as well, including the total health of the company, before jumping on a potentially good stock opportunity.

Even though the book value per share is not highly utilized in stock analysis, it is an important term to remember. It can help in business analysis, and it could come in handy for further analyzing a potentially undervalued stock.

More to come on stock and finance terms in the coming weeks!

Photo Source