Not sure how to assess a stock or company? It’s not surprising. Few people actually understand this kind of math. By using the Book Value of Equity Per Share [1] (BVEPS [1]) you get a minimum value of the company’s equity [2]. This worth is determined by comparing the original value of the common stock [3] and is adjusted for outflow. Outflow may include such costs as dividends and stock buybacks. It also takes inflow (earnings) into account.
The calculation is based upon the following equation:
BVEPS = Value of Common Equity/# of Shares outstanding
Book value [4] of equity per share is one tool that you can use to help you decide if a stock is properly valued. It isn’t considered a very reliable tool, but in combination with others it gives a global view. Specifically BVEPS is best for giving a quick glance at a moment in time relating to the current situation of a particular firm. The future, though, is completely ignored in this calculation.
Just because a company’s share price is lower than its BVEPS does not necessarily indicate that it is undervalued [5]. By looking ahead it is possible to see if the company will have a chance at growth. If the company is looking at a bleak future with few opportunities for expansion, then the lower share price is justified. This information is not provided by the book value of equity per share (BVEPS), and is only visible when other tools are also added to the assessment. No investment should be made based upon the information provided by only one tool.