Definition and Computation of Book Value per Common Share

Understanding Book Value Per Common Share

Book value per common share, also known as BVPS, is a metric used to determine the per-share book value of a company, specifically for common shareholders. It is calculated based on the common shareholders’ equity in the company. It is important to note that the book value of a company is the difference between the total assets and total liabilities of the company and does not reflect the share price in the market.

Calculating Book Value Per Common Share

The formula for calculating the book value per common share is as follows:

BVPS = \frac{Total \ Shareholder \ Equity – Preferred \ Equity}{Total \ Outstanding \ Shares}


BVPS = \frac{Total \ Shareholder \ Equity – Preferred \ Equity}{Total \ Outstanding \ Shares}

Interpreting BVPS

BVPS provides insight into the original funds a company raises through the issuance of common equity, taking into account earnings, losses, and dividends. Stock buybacks can impact BVPS by reducing both the book value and the total common share count. It is essential to consider the diluted common shares over the past year to reflect any potential changes stemming from stock options, warrants, preferred shares, and other convertible instruments.

Illustration of BVPS

As an example, assuming XYZ Manufacturing’s common equity balances at $10 million and 1 million common stock shares are outstanding, the BVPS would be $10 per share. By generating profits to expand assets or reduce liabilities, a company can boost its common equity and subsequent BVPS.

Differentiating Market Value and Book Value Per Share

Market value per share represents the current stock price, reflecting what investors are willing to pay for a company’s common share. In contrast, book value per share uses historical costs, while market value per share focuses on future earnings potential, growth prospects, and overall business stability.

Accounting principles handle transactions differently, leading to discrepancies between market and book values per share. For instance, marketing costs that enhance a company’s brand value might not be immediately factored into the book value calculation, causing divergence between market and book values per share.

Comparing Book Value Per Share and Net Asset Value (NAV)

While BVPS focuses on per-share equity, NAV is a metric specific to mutual funds or ETFs, calculated by dividing the total value of the fund’s securities by the total shares outstanding. NAV provides daily evaluations for mutual funds. Analysts consider total annual return a more precise performance measure, yet NAV serves as a useful interim tool.

Challenges with BVPS

BVPS may not capture intangible assets like intellectual property or human capital, especially prevalent in industries such as banking or high-tech. These non-tangible assets can significantly impact a company’s market value, even in liquidation scenarios.

Correction—Jan 23, 2023: This article has been updated to clarify that creditors are paid after assets are liquidated.