What it means
The starting point is shareholders' equity, which is total assets minus total liabilities as recorded in the accounts. Anything owed to holders of preference shares is taken out first, because that money does not belong to ordinary shareholders.
What remains is divided by the number of ordinary shares outstanding. The measure is most useful where the balance sheet carries most of the value.
Banks, insurers, property companies and investment trusts hold assets recorded close to their market worth, so book value per share means something concrete. In a software or services business, where the value sits in people, code and brand, it means very little.
Comparing the share price with book value per share gives the price-to-book ratio. A ratio below one says the market believes the assets are worth less than the accounts claim, or that the company will keep reducing that value, and either reading is a prompt to look harder.
Several accounting choices move the figure without anything real changing. Buying back shares above book value reduces book value per share, writing off goodwill cuts it sharply, and revaluing property can lift it overnight.
Anyone tracking the number over time should check what changed in the accounting as well as in the business. Tangible book value per share strips out goodwill and other intangible assets, and it is the version lenders and bank analysts usually prefer.
It answers a harsher question about what would be left for shareholders if only the assets that could actually be sold were counted.
In practice
Real-world examples.
Example
An insurance analyst values a general insurer at 1.2 times book value per share. With BVPS of $24.00 that gives a target price of 24.00 x 1.2 = $28.80, and because the insurer's assets are mostly bonds carried at market value the measure is a sensible anchor.
Example
A bank's board is considering a share buyback with the shares trading at 0.8 times book value. Buying below book value raises book value per share for the remaining shareholders, which the finance director quantifies for the board before it votes.
Example
A private investor compares two engineering groups with similar earnings and finds one trading at 0.9 times book value and the other at 3.4 times. Reading the notes, she sees the cheaper one owns its factories while the expensive one leases everything, which explains most of the gap.
Formula
Calculation
BVPS = (total shareholders' equity - preference share equity) / number of ordinary shares outstanding
A regional bank reports total shareholders' equity of $480,000,000, of which $30,000,000 belongs to preference shareholders, and it has 50,000,000 ordinary shares in issue. Equity attributable to ordinary shareholders is 480,000,000 - 30,000,000 = $450,000,000, so BVPS is 450,000,000 / 50,000,000 = $9.00 per share. With the shares trading at $13.50, the price-to-book ratio is 13.50 / 9.00 = 1.5 times. If the bank then wrote off $50,000,000 of goodwill, ordinary equity would fall to 450,000,000 - 50,000,000 = $400,000,000 and BVPS to 400,000,000 / 50,000,000 = $8.00, even though no cash had moved.Case study
Seen in the real world.
Lowenbrook Mutual Holdings is an illustrative, fictional savings institution that converted into a listed company. At listing it reported ordinary shareholders' equity of $620,000,000 against 80,000,000 shares, giving BVPS of 620,000,000 / 80,000,000 = $7.75, and the shares listed at $6.20, or 0.8 times book value.
The board used the discount deliberately. Over three years it bought back 10,000,000 shares at an average of $6.80, spending $68,000,000 and leaving equity of about $552,000,000 across 70,000,000 shares, which is BVPS of $7.89. Buying below book value had lifted the figure for everyone who stayed.
A new chief executive then paid $90,000,000 for a loan portfolio, of which $30,000,000 was recorded as goodwill, and a later impairment wrote that goodwill off in full. BVPS fell by roughly 30,000,000 / 70,000,000 = $0.43 per share, and the illustrative lesson is that capital allocation decisions show up in this one number more clearly than in reported profit.
Watch out
Common mistakes.
- Treating book value per share as a floor under the share price, when assets can be worth far less than the accounts say, particularly in a distressed sale.
- Forgetting to deduct preference share equity, which overstates what belongs to ordinary shareholders.
- Comparing price-to-book ratios across industries, where differences in how assets are recorded make the comparison meaningless.
Questions
People also ask.
Why do technology companies trade at many times book value?
Because most of their value comes from people, software and customer relationships that are never recorded as assets, so the accounting equity is small by construction.
What is the difference between BVPS and net asset value per share?
They are close relatives, with net asset value per share used mainly for funds and investment trusts where the assets are marked to market every day.
Does a buyback always raise BVPS?
No, it raises BVPS only when shares are bought below book value, and buying above book value reduces it for the remaining shareholders.
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