Book value per stock

You will come across this term very often in investment literature. Book value per stock indicates what each stock of a company is worth according to the company's books of accounts. The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the stockholders, called the stockholders' funds. If you divide stockholders' funds by the total number of equity stocks issued by the company, the figure that you get will be the book value per stock.

Book Value Per Stock = Stockholders' Funds/Total Number of Equity Stocks Issued

The figure for stockholders' funds can also be obtained by adding the equity capital and reserves of the company.

Book value is a historical record based on the original prices at which assets of the company were first purchased. It doesn't reflect the current market value of the company's assets. Therefore, book value per stock has limited usage as a tool for evaluating the market value or price of a company's stocks. It can, at best, give you a rough idea of what a company's stocks should be worth. The market prices of stocks are generally much higher than what their book values indicate. Therefore, if you come across a stock whose market price is around its book value, the chances are that it is under priced. This is one way in which the book value per stock ratio can prove useful to you while assessing whether a particular stock is over or tinder priced.