Knowing the Book Value Per Share
The book value per share of a company is very easy to calculate and gives a fair idea of what a common shareholder can claim from the company because of holding the shares. Also it lets you know whether a stock is undervalued or overvalued at any point of time.
A common shareholder gets what is left over after the corporate debt holders, preferred shareholders and govt-tax. The dividend to a common shareholder comes after the company pays to debtors, preferred shareholders of the company and taxes. The book value of a particular share then becomes the price he gets after all these have been paid to. It is not the market price of a share.
The book value is easy and quick to calculate. With the availability of online finance related websites like Yahoo Finance one can find the balance sheet, assets and share capital of a company. From this information one can find the book value of a stock by subtracting the debt to be paid to debt holders, tax and preferred shareholders? pie from the accounting value of company’s assets. By dividing this value by the total number of outstanding shares, one can get the book value per share.
The book value per share can also be supplemented with the P/E ratio when comparing two companies. Some times the company’s financiald are so good that the book value per share is larger than the market price at which it is trading. Then the stock is undervalued. As we know from the world?s famous investor of all time, Warren Buffet, that we need to buy fundamentally sound stocks at the cheapest possible price. Some times reverse can happen. But at any time the share price will be higher than book value per share. But if it is too high and the company’s future growth is not as predictable then it is better to leave the stock.
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2 Comments
Interes work,. nice.
Thanks for the comment, denus.