There are many ways to understand the financial health and performance of a business. In particular, the book value per share is a way that investors apply to cover and quantify the value of a business. So What is book value? And how is the formula calculated? More details will be found in the article below.
What is Book Value (BV)?
Book value – Book value is the value of a business that is assessed according to the value of all assets of that business after deducting debts. In the worst-case scenario if the company goes bankrupt, the book value is the amount of money left over by shareholders after liquidating assets and paying off debts.
Book Value (BV) Formula
The formula for calculating book value (BV) is:
BV = total assets (excluding intangible assets) – Total liabilities = (Short-term assets + Long-term assets – Intangible assets) – (Long-term liabilities + Short-term liabilities) = Equity – Intangible assets – Total debt
What is Book Value Per Share (BVPS)?
Book value is used as an indicator of the value of a company’s stock. It can also be used to predict the future market price of a stock.
The formula for calculating the BVPS index is:
BVPS = (Equity – Intangible Assets)/ Total number of outstanding shares.
BVPS = (Equity – Intangible Assets – Liabilities)/ Total number of outstanding shares.
- Intangible assets (intangible fixed assets) = Cost – Accumulated depreciation
- Debt (Liabilities) = Long-term debt + Short-term debt
For example: Company A has equity capital of 1 billion VND, total intangible assets are estimated at 200 million VND. At the same time, company A currently has a debt of 300 million. The total number of outstanding shares of the company is about 20,000 shares. So the book value per share of the company is:
BVPS = (1,000,000 – 200,000 – 300,000)/20,000 = 25,000 (25 thousand VND)
What Is The Meaning Of The BVPS Index?
Book value per share is extremely important in forming the P/B ratio used to compare stock prices in the market with the book value of the business.
What is a P/B Ratio?
P/B is a ratio of book value – Price per book value to compare the value of the company’s shares in the market with the actual book value of the business. The formula for calculating the P/B ratio is:
P/B = Market price of stock / Book value per share.
P/B = Stock Capitalization/Book Value.
In which, stock capitalization is the total market value of outstanding shares.
Stock Value Analysis By P/B
Investors will rely on the P/B ratio to value the company’s shares as well as the business and financial situation of the business.
- P/B > 1, stock’s market value is larger than book value.
- P/B = 1, stock’s market value is similar to book value.
- P/B < 1 , stock market value is lower than book value.
If the P/B value is high, it means that the value of the business is low, the business has a lot of intangible assets or has a lot of debt, and has capital to rotate the business and increase production. If the P/B value is low, it means that the enterprise’s asset value is large, has little debt, and mainly uses its own capital for production and business.
Limits of Book Value Per Share
Book value per share – BVPS of the enterprise still has some limitations which are:
- Book value is reported quarterly or annually. Therefore, only when a company issues financial statements can investors know the book value per share to value the business and cover the business financial position of the enterprise during the period of time. via.
- Book value per share is an adjusted, accounting entry. In addition, businesses are required to report a higher book value due to depreciation accounting practices even in the event that the book value may decrease.
- Technological machinery and equipment will have a reduced lifespan and become obsolete quickly. However, its book value must be higher than it actually is.
- Book value does not consider the case if the enterprise uses machinery and equipment as collateral for the loan.
What is book value? Book value of a business is the total assets of the business excluding intangible assets minus total liabilities. Investors rely on this value to review the financial statements and business results of the business on a quarterly or yearly basis.
Information edited by: lamchutaichinh.vn