Book Value of share

Book Value of Share

Every stock of the company has a few terms linked with it like the market value, face value, and book value of the share. Book Value along with the Current Market Price is and used as an indicator by the investors to verify whether the stock is undervalued or overvalued. Here in this article, we are going to discuss the book value of the share. This article includes, What is the book value of the share, How to calculate book value, What is P/B ratio and also the flaws of Book Value.

What is the Book Value Per Share?

Book Value Per Share (BVPS) indicates the accounting value of each share of a particular stock. It also indicates the net asset value of the stock per one share. Whereas the current market price is the price at which the stock is traded on the exchange is the amount of money an investor is ready to pay for one share of that company. In simple words, Book Value is the amount that investors would theoretically receive if the company was liquidated.

How to Calculate Book Value Per Share?

Book Value per share is calculated by summing up all the company’s assets, subtracting all the debts, liabilities which also includes the liquidation value of preferred stock in the numerator. The denominator consists of total outstanding shares of the stock.

Let us take an example to understand this

If Company A has an asset of Rs 1000 crores and also has total liabilities of Rs 500 crores. There are a total of 10 crores of shares outstanding.

BVPS= Rs (1000-500) crores/ 10 crores

= Rs 500 crores/10 crores

= Rs 50

What is P/B Ratio?

P/B is the ratio of the stock's current market price divided by the book value of the stock. This is one of the important indicators to find out the undervalued stocks. Especially for the investors who are using a value investing strategy. This ratio helps us to track whether the company is traded at a fair valuation or not. If the P/B ratio is less than one, it states that the company is undervalued and the price of the stock is going to rise in the future. Though some other factors are also linked with it to grow.

There are also cases when the market price of the share is much higher than the book value because investors are bullish about the growth of the company and the returns which the company can give in the future. This ratio is used by the most conservative investors rather than aggressive investors.

For example

Adani Greens have a P/B ratio of 181.32 as of today.

Twenty-first Century Management Services Limited has a P/B ratio of 1.01 as of today.

Now let us see how P/B works

This is the list of the top 10 companies of India by market cap

This Market Price is as of 30th July 2021.

We can see TCS and Infosys being computer-software-based companies that have a higher P/B ratio than Reliance. Reliance has a business of refineries that requires a large number of tangible assets. So, there is nothing like an ideal P/B. It varies with the sector and chances of the company to perform better shortly.

We can clearly see some private banks like HDFC Bank, Kotak Mahindra Bank, and ICICI Bank have nearly the same P/B, ranging between 3.5 to 4.5.

What is the issue with the Book Value of Share?

One of the major issues with the book value is that it doesn’t include the value of intangible assets of the company (It includes only accounting value). Intangible assets include the brand name of the company, and intellectual property such as patents, copyrights, and trademarks. Many pharma companies are highly rated based on the patents they have.

We saw in this article what is the book value of a share, How Book Value is calculated, how it is helpful, and the importance of P/B value. One shouldn’t invest in the stock just because the company has a lower P/B ratio. Value investing includes certain factors which need to be monitored like Return on Equity, Return on Capital Employed, Price to earning ratio, etc.