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Book value per share

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:

  • [href="/?p=Fundamental-Analysis.Balance-Sheet-Items&t=Book+Value"]Book value[/HREF]
  • [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Debt+to+equity+ratio"]Debt to equity ratio[/HREF]
  • [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=EPS+rank"]EPS rank[/HREF]
  • [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+book+ratio+(P/B)"]Price to book ratio (P/B)[/HREF]
  • [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+cash+flow+(P/CF)"]Price to cash flow (P/CF)[/HREF]
  • [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+dividend+(P/D)"]Price to dividend (P/D)[/HREF]
  • [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+earnings+(P/E)"]Price to earnings (P/E)[/HREF]
  • [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+sales+ratio+(P/S)"]Price to sales ratio (P/S)[/HREF]
  • [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Times+interest+earned"]Times interest earned[/HREF]