What Is the Book Value Per Share of Common Stock?
Financial professionals and investors frequently use the book value per share to determine whether the stock of a company is over- or undervalued. The formula is relatively simple and the values needed to calculate it can be found in the company's annual report. This document is usually provided on the organization's website.
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Meaning of Book Value per Share
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Book value per share is an accounting mechanism to determine the worth of each share. When a person purchases common stock during the initial offering from the company, they are in essence supplying the company with equity, or money, to build the business. This ratio simply determines how much equity is tied into one share of common stock.
Formula
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The formula for the book value per share is: Shareholders equity divided by the number of common shares outstanding. So, in the annual report, locate the balance sheet and find the amount listed for shareholders equity for common stock. Remember this amount is generally listed as a portion of 1,000. For example, if the annual report lists shareholders equity as 1,200, it means 1,200,000. The annual report will state this conversion at the top of the balance sheet. The number of shares outstanding are generally stated in the same location as the amount.
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Market Value per Share
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The value at which a common stock is being traded is called market value. These are the values that are listed on tickers and in papers and that come up with doing a search through a financial or investing website.
Comparing Book Value and Market Value
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Comparing book value to market value can help to determine if a stock is over- or undervalued. If book value is somewhat lower than market value, then it may be that the stock is overvalued at that particular time. The same is true of the opposite. However, if there is a drastic difference in the two numeric values, then it may be irrelevant.
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References
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