What it means
The starting point is total shareholders' equity, which is assets minus liabilities. Preference share capital is deducted because those holders rank ahead of ordinary shareholders, and the remainder is divided by the ordinary shares actually in issue rather than any theoretical fully diluted count.
Investors use it mainly as a comparison against the share price. A share trading below its book value may be cheap, or the market may simply believe the assets are carried at more than they would fetch, and separating those two cases is the analytical work.
The measure works far better in some industries than others. Banks, insurers and property companies carry assets that are mostly financial or physical and regularly revalued, so book value means something; software and consultancy firms carry almost none of their real value on the balance sheet.
Intangible assets are the usual complication. Many analysts strip out goodwill and other intangibles to produce tangible book value per share, on the grounds that goodwill from a past acquisition would fetch nothing in a wind-up.
Share buybacks make the number move in ways that surprise people. Buying back shares above book value reduces book value per share for everyone remaining, while buying back below book value increases it, which is why the measure is watched closely during buyback programmes.
Growth in the figure over time is often more informative than its level on any single date. A bank whose book value per share climbs steadily year after year is retaining profit and compounding equity, whereas a flat or falling line points to losses, write-downs or dividends paid out of capital the business needed to keep.
In practice
Real-world examples.
Example
A value-focused fund manager screens for industrial companies trading below book value. She then inspects each one's property holdings, since several are carrying factories bought decades ago at costs far below current market value.
Example
An insurer reports book value per share every quarter as its headline measure because its assets are almost entirely financial instruments marked to market. Analysts track the growth in that figure more closely than reported earnings.
Example
A software firm trades at eleven times book value, which alarms a new board member until the finance director explains that the company's engineers, code and customer relationships appear nowhere on the balance sheet.
Think of it
“Book value per share is like dividing a house's appraised value (minus mortgage) among family members. Each person's share represents their portion.
Formula
Calculation
Book value per share = (total shareholders' equity - preference share capital) / ordinary shares in issue
A regional bank reports total shareholders' equity of $480,000,000, of which $30,000,000 is preference share capital. Equity attributable to ordinary shareholders is therefore $480,000,000 - $30,000,000 = $450,000,000.
The bank has 50,000,000 ordinary shares in issue, so book value per share is $450,000,000 / 50,000,000 = $9.00. With the shares trading at $13.50, the price to book ratio is $13.50 / $9.00 = 1.5, meaning investors are paying $1.50 for every dollar of accounting equity.
If the bank also carried $50,000,000 of goodwill, tangible book value would be $450,000,000 - $50,000,000 = $400,000,000, giving tangible book value per share of $400,000,000 / 50,000,000 = $8.00 and a price to tangible book ratio of $13.50 / $8.00 = 1.69.Case study
Seen in the real world.
This is an illustrative and fictional example. Ravensworth Marine, an invented shipping operator, had 20,000,000 shares and equity of $240,000,000, giving book value per share of $12.00, while the shares traded at $7.00.
A visiting analyst assumed the fictional company was obviously undervalued at little more than half its book value. Closer reading showed that its fleet had been bought at the top of a shipping cycle and was carried at cost less depreciation, while comparable vessels were changing hands at roughly 40% below those carrying values.
Ravensworth's imagined auditors required an impairment the following year, writing $80,000,000 off the fleet and cutting book value per share to $160,000,000 / 20,000,000 = $8.00. The share price barely moved, because the market had already priced in the write-down that the accounts had not yet recognised.
Watch out
Common mistakes.
- Treating book value per share as what shareholders would receive in a liquidation, when assets rarely sell for their carrying value.
- Forgetting to deduct preference share capital, which overstates the amount attributable to ordinary shareholders.
- Applying the measure to asset-light businesses where the real value sits in people, brands and software that the balance sheet never records.
Questions
People also ask.
Why do some companies trade below book value?
Either the market doubts the carrying values of the assets, or it expects future losses that will erode equity.
What is tangible book value per share?
The same calculation after removing goodwill and other intangible assets, giving a more conservative figure.
Does a share buyback help book value per share?
Only if shares are repurchased below book value; buying above it reduces the figure for remaining shareholders.
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