Investing in the stock market is one such thing that gaining more and more attention these days. The number of retail investors has increased significantly and a lot of money is being pumped into the stock market. Investors, in times of extreme inflationary pressure, are looking towards investing in equities instead of traditional saving schemes to get higher returns. This has also helped a number of listed companies to raise their market capitalization and expand their business operations.
Although investing in equities has now been made completely hassle-free, picking up quality stocks to get higher returns in the future still requires a fair bit of research. Fundamental analysis is the way by which you pick up good stocks for your portfolio. One such element in fundamental analysis of any stock is Book Value Per Share (BVPS) which tells a lot about the company as well as its stock and helps you to decide whether or not or when you should invest in that particular stock.
Book Value Per Share is one of the valuable metrics in the fundamental analysis of any stock.
What is Book Value Per Share?
Book Value Per Share (BVPS) can be defined in multiple ways. The primary definition is that it is the ratio of the available equity to general shareholders to the total number of outstanding shares. Book Value shows up a company’s net asset (total assets – total liabilities). Hence, in simple terms, Book Value Per Share reflects a company’s net asset on a per-share basis.
BVPS also reflects the raw value of a company’s share that shows whether the stock is undervalued or overvalued based on the current market price.
Calculating Book Value Per Share (BVPS)
The formula to calculate BVPS is (Total Equities – Preferred Equities) / Total Number of Outstanding Shares, or
(Total Assets – Total Liabilities) / Total Number of Outstanding Shares
The only difference between Book Value and Book Value Per Share is that the former shows the raw value of the company, while the latter shows the raw value of its stock.
Analyzing Stocks Using Book Value Per Share
Analyzing any stock requires you to understand its fundamentals, and BVPS, in this case, helps us to understand the clear picture of the company’s true value. It helps investors evaluate the quality of stocks in the following ways:
Real Value of the Stock: Undervalued or Overvalued
BVPS can work as a metric to determine whether a particular stock is undervalued or overvalued. If a company’s Book Value Per Share is more than its current market price, then the stock is considered to be undervalued. In this case, an investor can buy the stock to generate profit in the future. This is because, the price of an undervalued stock is likely to increase in the future, and should come atleast equal to its BVPS. Whereas, on the other hand, if the BVPS is less than the stock’s current market price, it reflects that the stock is overvalued, and should be avoided for the time being as its market value may fall in the future.
Many traders, who had earlier bought a stock when it was undervalued, wait for the perfect time to book profit by selling the stock. This can be done when the stock becomes overvalued. But how will the investor understand this? Book Value Per Share helps the investor to decide when to book profit. If the BVPS falls below the stock’s current market price, the investor can decide to book profit considering the fact that the stock has now become overvalued and the price might fall in the near future.
Using Other Metrics Along with BVPS
BVPS shows whether a stock is undervalued or overvalued. But is the under/overvaluation of stock is the final and decisive factor to take an investment decision. Certainly, the real picture of the stock market tells a different story. For example, the BVPS of some noted companies like Reliance Power, Reliance Infrastructure, NHPC, Oriental Bank of Commerce, etc. is more than their current market prices (as of May 2021). But does that mean that they are quality stock to put money into? The answer can be both Yes or No, which depends on other fundamental metrics of the stock. Also, many stocks are trading over Book Value Per Share for a long and their prices are also increasing day by day. As an investor, you must also look out for reasons why there is a gap between the stock’s BVPS and current market price. And the best way of making a sound decision while picking up stocks for your portfolio is to take other metrics along with BVPS into consideration.
Book Value Per Share is one such metric that is used by a number of investors to make wise investing decisions. However, a wise investor not only follows only a single metric but enhances the power of the metric by doing a complete fundamental analysis of the stock. This allows him/her to pick high quality stocks and earn healthy profits in the future.