There are several listed companies in the stock market. Whether any of them is worth investing in or not is a difficult question.
Every analyst and investor uses different approaches to determine if a company’s valuation is reflected in its share price or not.
One of these approaches is calculating the book value. We’re going to help you understand what is book value of share!
What is the Book Value of Shares?
It is essential to know how much a company’s actual value is by deducting the noise of the equity market. This is where the book value of share comes into the picture.
BVPS or book value per share is a company’s value according to its balance sheet. In simpler words, it is the value of an asset after deducting the depreciation calculated over time. Let’s understand the concept of book value better with the help of an example.
Assume that a machinery tool costs ₹10,00,000 and its depreciation over time is ₹5,00,000. The book value of that machine is now ₹5,00,000.
The book value keeps changing every year, and its value depends on how much depreciation has taken place in that year.
Book value is the company’s total assets against the liabilities and intangible counterparts. Typically, a share’s book value is lower than its market value.
Book Value Calculation
As a part of understanding how to buy and sell shares online, it is important to learn what is book value in share market and its calculation.
The book value of equity is calculated after deducting the liabilities of a company from its assets.
The formula for calculating book value is:
Book Value = Total Assets - Total Liabilities
Book value represents the net asset value of a company for every share. This enables you to compare different companies while learning how to purchase shares online.
To calculate the book value of a company’s share, you need to have access to its latest financial report, including the balance sheet.
Importance of Book Value
While learning how to invest in stocks online, you will understand the importance of book value. It is an indispensable component to determine if you should invest in a particular company or not.
That’s why as an investor, you should always look at the book value of the company and the price/book ratio to make the decision.
The Price/book ratio is the comparison between a company’s market cap and book value. It is calculated as = Market price of shares/book value per share.
P/B Value < 1
If the P/B ratio is lower than 1, this signifies that the company’s stock is undervalued, and it is a good investment option.
P/B Value > 1
If it is more than 1, it states that the stock is trading at a premium. For example, if the p/b ratio is equal to 2, we can say that the shares are overvalued.
Book value per share informs the shareholder about the fundamental value of a company, irrespective of the current market price. That’s how you learn whether the stock prices will increase or decrease over time.
Limitations of a Book Value
If book value is an integral part of share trading online, it also comes with its own set of drawbacks.
1. Historic Costing
Maximum values of assets are represented according to their historical cost. They don’t signify the actual asset appreciation or depreciation and are dependent on accounting principles. This can lead to discrepancies.
2. Periodic Publishing
The balance sheet of every company is reported annually or quarterly. During this period, investors don’t have an idea about the organization’s book value per share. If all the decisions are taken according to old figures, it might result in the wrong analysis.
3. Inaccurate for Human-intensive Companies
Sometimes a company completely relies on human capital. This may lead to an erroneous reflection of their value in the financial statements. Thus, the book value is not an appropriate choice in such a situation.
We hope that now your understanding of what is book value of a share is clear. The book value of a company is dependent on its financials. It is clear that book value plays a significant role while searching for the right company to invest in.