Book Value Per Share:Is It Important for Investors?

Devin Halim Wijaya26 September 2024

0 4 3 minutes read

Book Value Per Share (BVPS) is frequently used in fundamental stock analysis to determine whether a stock is undervalued or overvalued. Although it may sound technical, BVPS plays an important role in helping investors understand the actual value of a stock. This article will explain the definition, calculation method, and the benefits and drawbacks of BVPS as an investment indicator.

What Is Book Value Per Share?

BVPS is a financial ratio that shows the net equity available for each outstanding common share. This value is calculated by dividing the total equity of common shareholders by the number of common shares outstanding.

BVPS Formula:

BVPS = (Total Assets - Total Liabilities - Preferred Shareholders' Equity) / Number of Common Shares Outstanding

For example, if a company has total assets worth Rp1 trillion, liabilities of Rp200 billion, and 10 million shares outstanding, then the company’s BVPS is calculated as:

BVPS = (Rp1,000,000,000,000 - Rp200,000,000,000) / 10,000,000 = Rp80,000 per share

This indicates that each share represents Rp80,000 of the company’s net assets.

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Why Is BVPS Important?

BVPS can be used to assess whether a company’s stock price is undervalued or overvalued. If the market price of the stock is lower than the BVPS, the stock is considered undervalued, meaning the market price is cheaper than the company’s book value. Conversely, if the market price is higher than BVPS, the stock may be considered overvalued.

For instance, if a company’s BVPS is Rp500 but the market price is only Rp400, then the stock is undervalued. Conversely, if the market price reaches Rp600, the stock may be considered overvalued.

Advantages and Disadvantages of BVPS

Advantages:

Indicator of Fundamental Value: BVPS provides a clear picture of a company’s real value based on its net assets, helping investors determine whether the stock price is worth buying or not.
Relevant for Companies with Large Physical Assets: BVPS is highly useful for evaluating companies with many physical assets, such as manufacturing or real estate companies.

Disadvantages:

Does Not Reflect Growth Potential: BVPS only reflects the current financial condition without considering the company’s potential future growth. This makes BVPS less relevant for rapidly growing companies, especially in the technology sector.
Excludes Intangible Assets: BVPS does not account for intangible assets such as intellectual property, trademarks, or patents. Companies like Google or Microsoft may have low BVPS because most of their value is in non-physical assets.

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Using BVPS with Price to Book Value (P/BV)

BVPS is often used in conjunction with the Price to Book Value (P/BV) ratio to give a clearer picture of a stock’s valuation. P/BV Formula:

P/BV = Market Price / BVPS

If the P/BV ratio is below 1, the stock is considered undervalued. If it is above 1, the stock may be overvalued. However, P/BV does not always provide a complete picture, especially if the company is experiencing significant financial problems. Therefore, using it alongside other ratios such as Price to Earnings (P/E) and Return on Equity (ROE) is important to get a fair assessment of stock valuation.

Conclusion

Book Value Per Share (BVPS) is an important tool in fundamental analysis to evaluate a stock’s valuation. Although BVPS offers a good overview of a company’s real value, it has limitations, especially in considering future growth and intangible assets. Therefore, BVPS should be used in conjunction with other ratios, such as the P/E Ratio and ROE, to obtain a more comprehensive view of a company’s value.

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