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  • What is the meaning of book value of a company share?

    Do you have difficulty in understanding book value of a company share? Looking out for detailed information here? On this page our experts shall respond to your query.

    Today more individual retailers are taking part in stock market investment and trading. In analysing the company's performance, many parameters are considered and book value is one of them. What is the meaning of book value and its effect on dividend payment? Will it change over the period of time?
  • Answers

    6 Answers found.
  • This is generally called Book Value per share (BVPS). It is a ratio of the common equity of a company and number of shares outstanding. This value will indicate the firm's net asset value on a per-share basis. This will be used by stock investors to evaluate a company's stock price. BVPS is the amount a shareholder receives per share in case if the company is liquidated.

    Example: Let us take a company having an equity balance of Rs 1,00,00,000. Let us imagine 10,00,000 shares are outstanding. Then the BVPS will Be 1,00,00,000/ 10,00,000. That is equal to Rs 10/- on a per-share basis. If the company gets profits and use them to buy new assets or decrease the liabilities company's common equity increases. Another way of increasing the BVPS is to buy back the shares by the company, In the above example from the 10,00.000 shares, if the company purchases another 2,00.000 shares, the outstanding shares will be 8,00,000. If there is no change in the equity balance the BVPS will be 1.00,00,000/ 800000 that is Rs12.50 BVPS, Dividends per share = Total dividends/ outstanding shares. If outstanding shares decreases dividend per share will increase. BVPS increases dividend per share will also increase. If it decreases the dividend per share will also decrease.

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  • Book Value or more precisely book value per share (BVPS) is calculated by taking the ratio of equity available to common stockholders against the number of shares outstanding. It is an indicator of as how the company's stock is valued. Generally a company has preferential shares for its promoters and normal shares for the public. Whenever a company is liquidated then the preferential share holders are treated preferentially or they rank higher in that treatment so for book value consideration, these preferential shares are not to be taken in account.

    Let us try to understand this through a practical example. Suppose a company has Rs 250,00,000 worth of stockholder's equity and out of this Rs 10,00,000 is preferential equity. Let us also assume that there are 50,00,000 numbers of outstanding shares of the company. So we can calculate BVPS as -
    BVPS = (25000000-1000000)/5000000 = 4.80
    So, BVPS is Rs 4.80/share

    As we mentioned earlier that BVPS is an indication of stock value and if BVPS is more than the market share price then we can deduce that the stock price in the market is undervalued. So the investors and share broker use this indicator for taking a decision on the investment and also on their buy and sell timings.

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  • I would like to explain this in easily understandable terms.

    Owners' capital of a big company is by share capital received from all the shareholders.
    Good companies plough back a part of their profit for use in future expansion etc. They are retained earnings. This is generally known as Reserve. This gets accumulated over time. The total of Share Capital plus Reserve at any time is called the Shareholders Equity. That is the book value(BV).

    Book Value in common usage in share market investment analysis generally means Book Value of a share or Book Value Per Share(BVPS). That means it is the answer we get by dividing the total Shareholder Equity by total number of shares.
    So BVPS = BV / No. of shares outstanding
    (For easy understanding I am presuming that there are no preferred shares. If so they have to be reduced from the total share capital to calculate book value.)

    Here what w have to differentiate is BVPS is different from Face Value of shares and also different from Market Value of share.

    But BVPS gives investors an idea about the strength (net worth) of a company. It also gives an idea whether the share is reasonably priced in the market or overpriced or under priced. Thus BVPS is one of the min parameters in taking an investment decision.

    When the BVPS is much more than the Market Value, investors can sometimes expect a bonus share issue also.
    Book Value per se is not any indication of dividend payment. It is more about pricing of shares in the market and also about the tangible worth of the company.

  • Valuation of share of a company in terms of its value as per books of accounts on a particular date of balance sheet is called book value of share.
    Now there are various method for such calculation, but the author has asked for book value , I am giving the answer here:-
    1. Value of share denoted the differences between total assets and liability (excluding intangible assets and liability) divided by the numbers of share held on a particular date of balance sheet.
    Suppose ISC Ltd. has total assets as per balance sheet on 31.12.2020 Rs.500 lacs, Total liabilities on that date were (liability 400 lac, +preference share fund 20 lac, + equity share fund 80 lac)=500 lakh.

    Total value of assets of a company as per balance sheet as on 31.12.2021 Rs. 500 lac
    less: total liabilities of the company 400 lac
    Total shareholder's fund 100 lac
    less Preference shareholders fund 20 lac
    Balance available for equity shareholders 80 lacs
    (suppose there are 100000 nos of equity shares) value per equity share 8000000/100000= Rs.80.00
    hence book value per share(equity share) Rs.80 per share on 31.12.2020.
    Now the equity share holders are treated the owner shareholder of a company only and book value of a share means value of equity share.

    2. Effect on dividend : Generally if the book value is greater than market value of share it is said that the share is under valued and vis versa. Dividend is paid out of reserve or profit and loss accounts balance which is a part of equity share holder's fund reduced after payments and book value of share will also be decreased. Sometimes the company changes the value of share by re-purchasing share from the market or issue fresh share to the public.
    3. So the valuation will remain unchanged if there is no transactions of issue of bonus, dividend, purchase, re-purchase of equity shares. And any transaction on these head will changes the value of book value of share. I think the doubt is clear now.

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  • Book Value of a company share is indicative of present valuation of this stock. It would represent the statement of the minimum value of the equity of the company. The same is guided by a formula indicated below -
    BVPS= Total share holder's equity/ Total outstanding common share.
    If a company has Rs 80 crore worth total assets and Rs 50 crore worth of total liability, in that situation the book value would be Rs 30 crore. This fund would be available to the share holders.
    In case, Rs 30 crore is distributed among 5 crore of share holders, in that situation book value per share would correspond to Rs 6/-. According to financial analysis, the price of book value signifies the status of its present valuation whether undervalued or otherwise. This would help the new investors to understand the current value of the stocks of the market.
    The investors should not be guided with low value stocks only but they would be required to investigate the financial health of the company with more research such as its performance for last five years, the present scenario such as Covid-19 phase or any change of existing Board of Directors etc. These parameters may affect the performance of the company.

  • Book value per share depicts the accounting value of each share of stock of any listed company.

    Formula: (Total Shareholders' Equity – Preferred Equity) / Total Outstanding Common Shares

    Book Value Per Share will help investors in deciding whether the company is undervalued or overvalued.

    Lets see how the Book Value per Share is calculated with an example.

    Total assets of a company is Rs.200 Cr.
    Total Liabilities of a company is Rs120 Cr.
    Now the net worth of the company is Rs. 80 Cr.
    Lets assume that the share outstanding is 10Cr.
    Book Value per Share - 80/10 = Rs.8.

    It is obvious that many companies trade below the book value per share. There may be many reasons. But the major reasons is lack of confidence among investors regarding the company performance and future.

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