Book
value per share is a ratio that is calculated
by subtracting all liabilities from all
assets, then dividing it by the total
number of outstanding shares (or equivalents).
The idea behind book value per share is
that if a company's calculated book value
per share is higher than the current stock
price, the company is undervalued. It
can also be used in the reverse where
if a stock price is substantially higher
than the book value per share that it
is overvalued and prone to corrections.
It is important to note that investors
using book value per share that they need
to understand book value and its limitations.
Limitations in book value also directly
apply to book value per share.
To
calculated book value per preferred share:
(Share
capital of preferred and common stock
+ contributed surplus + retained earnings)
/ number of preferred shares outstanding.
General
value guidelines are as follows:
- Utilities
& industrials: Minimum equity
value per preferred share in each
of the last 5 fiscal years should
be about 2 times the dollar value
of assets that each preferred share
is entitled to in the event of liquidation
- Other
industries: These numbers vary greatly
and should be compared to companies
that are about the same size and qualities
(compare against the primary competitors)
- Book value
per preferred share should also show
a stable or increasing value over
the last 5 year period.
To
calculate book value per common share:
(share
capital of common stock + contributed
surplus + retained earnings) / number
of common shares outstanding
General
value guidelines are as follows:
- There
is no generally accepted values
for this ratio and in practice
most fundamentalists will find there
is generally no substantial relationship
between the equity value per common
share and the market value. Some companies
(depending on industry) will trade
high above the equity value while
others are far below the equity value.
The difference between the equity
value per common share and the market
price is usually accounted for by
the actual/future earning power of
the company. Companies that have a
higher actual/future earning power
will generally have a higher market
value then equity value (example:
technology companies).
Based
on these guidelines, book value per common
share is not regarded as an effective
fundamental ratio to analyze market value.
Also
see:
United States
Canada
