Book value per share is a type of evaluation or measure of the worth of shares of stock issued by a specific company. The calculation makes it possible to identify the specific monetary amount that the investor would receive for each share in the event that the company’s assets had to be liquidated and all outstanding debts settled. This particular measure normally focuses on the book value of common shares rather than the value of preferred shares.
While there is sometimes confusion by what is meant by the market value per share and the book value per share, it is important to realize that the two figures are very different. The market value per share has to do with how much the share would sell for at today’s market prices, and is subject to constant change as the desirability of those shares shifts in the marketplace. In contrast, the book value per share is a figure that is carried on the company’s balance sheet, and is affected by the current outstanding debts that the company owes. Typically, the book value will be less than the current market value.
Monitoring the changes in book value per share from one accounting period to another can provide insights into the financial condition of the company. When that value increases, that is a sign that the business is managing its debt efficiently and that in the event of a business sale and liquidation, investors would receive a higher amount per share. At the same time, if the book value remains stagnant or is reduced over successive periods, this may point toward impending financial problems for the company, especially if the debt load is continuing to increase due to a reduction in income.
Investors may also want to consider the book value per share when making decisions about buying, holding, or selling those shares. This is especially true if there are some indications that the issuing company is facing an upcoming period of financial difficulty that could result in bankruptcy and eventual liquidation. In this scenario, investors would want to establish some benchmark for that book value per share, selling off the shares just before that figure is reached. Since many companies include the book value per share in the financial information released to investors in periodic reports and earnings meetings, tracking the current book value of the shares is a relatively simple task that requires very little in the way of time or effort.
