Calculate BVPS for any stocks you own, and you'll see it can be wildly different from the company's share price. This is because the share price is a demand-driven value that's influenced by the investment community's opinion on the company's earnings potential.
Book value, and therefore BVPS, does not consider the future at all. It is strictly a measure of the company's balance sheet values as of a point in time.
How can I use book value?
Investors commonly analyze book value in the context of the company's market value. The relationship between the two quantifies the premium that investors are paying (or not) to own that stock.
The metric used in this analysis is the price-to-book ratio or P/B ratio. You calculate P/B ratio by dividing the company's stock price by its BVPS. When the market value is higher than the book value, the P/B ratio will be greater than 1. This means investors are willing to risk more than BVPS for the stock's potential upside.
When the market value is near or less than the book value, the P/B ratio will be 1 or less, signaling that the stock may be undervalued. An undervalued stock can be a great bargain, particularly if company fundamentals are strong and the investor has a long timeline.
Unfortunately, this logic only applies to certain industries. Higher-growth industries typically see much higher P/B ratios. As an example, at the end of 2021, large-cap tech stocks had an average P/B ratio of 12.25. In that scenario, it doesn't make sense to use 1 as the benchmark.
Instead, you'd do peer comparisons and historical comparisons. If you're focused on investing in value, you'll look for a P/B ratio that's competitive with the company's peers and lower than the company's own historical averages.
The analysis doesn't stop there, of course. Value investors don't look at the P/B ratio in isolation. They evaluate it with several other metrics, including price-to-earnings ratio, free cash flow trends, debt-to-equity ratio, and payout ratio for dividend stocks. As noted, book value and the metrics derived from it come from balance sheet numbers -- which may not be a true representation of value.
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