Book Value of Equity per Share (BVPS)

Meaning of Book Value of Equity per Share

The book value of equity per share is a financial measure which indicates a per share estimation of the minimum value of an entity’s equity. Although the book value of equity per share is a factor that can be used by the investors to determine the value of stock, it presents only a limited value of the firm’s situation. In simple words, book value per equity share gives a snap shot of a firm’s present situation not including the future considerations of a firm.

Calculating book value of equity per share

The book value of equity per share is calculated by linking the original value of the common stock of a firm, adjusted for any outflow and inflow modifiers to the amount of outstanding shares. This value is calculated as:

BVPS = Value of Common Equity / Number of Shares Outstanding

The book value of equity per share is calculated by dividing the equity of shareholders by the number of shares issued. The equity of shareholders includes:

a. Paid up capital

b. Retained earnings and revenue capital

c. Capital reserves, including a qualified and quantified (in monetary terms) report issued by the auditors and the amount is deducted from the equity.

d. Surplus created by revaluation of fixed assets.

Standards for calculating book value of equity per share

The book value per equity share is calculated in accordance with a framework of certain recognized accounting standards. These include:

• An asset is a resource which is controlled by the entity as an outcome of precedent events and which form the basis for expected financial benefits in future.
• A liability indicates a current obligation of the entity arising from precedent events. These obligations, when settled, are expected to provide an outflow of resources from the enterprise thereby embodying economic benefits.

Summary

Book value per equity share is, therefore, a ratio calculated by deducting all the liabilities and obligations form all assets and thereafter dividing it by the total number of outstanding shares. The idea embedded in the concept of book value per share is that a book value higher than the current stock price indicates the undervaluation of a company and vice versa.