Book Value per Common Share vs. Net Asset Value: An Overview
Book value per common share, also known as book value per equity of share (BVPS), evaluates the stock price of an individual company. Net asset value (NAV) measures all of the equity holdings in a mutual fund, exchange-traded fund (ETF), or closed-end fund.
Admittedly, the two terms sound like they refer to similar things.
Key Takeaways
- Book value per common share (BVPS) calculates the per-share value of a company based on common shareholders’ equity in the company (it doesn’t include preferred shares).
- BVPS is calculated by dividing a company’s value of common equity by its number of shares outstanding.
- Net asset value (NAV) is the total value of an entity’s—usually a fund’s—assets minus its liabilities; it’s a way to evaluate the total worth of the fund’s holdings.
- You calculate NAV by subtracting an entity’s/fund’s liabilities from its assets, then dividing the answer by the entity’s/fund’s total number of outstanding shares.
Book Value per Common Share
Book value per common share (BVPS) is an equity evaluation measure that investors and analysts use to assess a conservative value of a company’s common stock. The value generated from the formula for this per-share evaluation shows the original value of the company’s stock, adjusted for outflows of dividends and stock buybacks and inflows of earnings modifiers, compared to total current outstanding shares.
Book value per common share is calculated as follows:
BVPS=number of shares outstandingvalue of common equity
Note that preferred stock is not included in the BVPS calculation. BVPS can be an important metric that helps investors determine if a stock is undervalued. However, BVPS gives only a narrow picture of the company’s overall current situation. It doesn’t factor in future prospects, and it fails to incorporate other intangible factors, such as intellectual property or human capital. So, by itself, it is an insufficient single indicator of a stock’s potential rise in value.
If a company’s BVPS is higher than its market value per share, then its stock may be considered to be undervalued.
Net Asset Value
Net asset value (NAV) is a per-share value calculated for a mutual fund, an exchange-traded fund (ETF), or a closed-end fund. For any of these investments, NAV is calculated by dividing the total value of all the fund’s securities by the total number of outstanding fund shares.
The formula for NAV is as follows:
NAV = (Assets – Liabilities) / Total number of outstanding shares
NAV is generated daily for funds. The total annual return (the geometric average amount of money earned by an investment each year) is considered by a number of analysts to be a better, more accurate gauge of a mutual fund’s performance, but NAV is still used as a handy interim evaluation tool.
Because ETFs and closed-end funds trade like stocks on exchanges, their shares trade at a market value that can be a few dollars or cents above (trading at a premium) or below (trading at a discount) the actual NAV. This allows for profitable trading opportunities for active ETF traders who can spot and cash in on such opportunities in time.
Similar to mutual funds, ETFs also calculate their NAV daily at the close of the market for reporting purposes. Additionally, they also calculate and disseminate intraday NAV multiple times per minute in real time.
NAV calculations are also used to evaluate real estate investment trusts (REITs), although the precise value of REIT holdings can be difficult to determine.
NAV has similar usefulness and limitations to BVPS, explained in greater detail later.
What Is Common Stock?
Common stock is a security that represents partial ownership in a corporation. Holders of this stock class have rights to a company’s assets in a liquidation event, but only after holders of preferred stock and other debt have been paid.
Book value per common share is used to assess a conservative value of a company’s common stock, but not of its preferred stock. Holders of preferred stock are granted superior rights to common stock, like higher dividend payments and a higher claim to a company’s assets in the event of liquidation.
What Are Mutual Funds?
A mutual fund pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities managed by finance professionals. Net asset value is a per-share value calculated for a mutual fund.
What Are Exchange-Traded Funds (ETFs)?
An exchange-traded fund (ETF) is an investment fund that holds multiple underlying assets and can be bought and sold on an exchange, much like an individual stock. ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of stocks. Net asset value is a per-share value calculated for an ETF.
What Are Closed-End Funds?
A closed-end fund is a type of mutual fund that issues a fixed number of shares through an initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund. Net asset value is a per-share value calculated for a closed-end fund.
The Bottom Line
Book value per common share (BVPS) is useful in that it allows investors and analysts to gauge whether a company’s stock is undervalued, but it is limited in that it may not fully reflect a company’s future growth prospects and doesn’t account for its intangible assets. As such, BVPS could be used with the price-to-book (P/B) ratio, an evaluation metric that is used to compare the current market price of a company’s stock to its book value, to evaluate whether that stock is indeed undervalued or overvalued.
Net asset value (NAV) is useful because it provides investors and analysts with a clear picture of the intrinsic value of a mutual fund, exchange-traded fund (ETF), or closed-end fund. NAV allows them to compare funds, assess their performance, and determine if a fund is trading at a premium or discount to its true worth, thus guiding investment decisions. Like BVPS, NAV is limited in that it only reflects the current market value of a fund’s tangible assets and doesn’t account for intangible assets or future growth potential. As such, NAV could be used with calculated intangible value (CIV), a method of valuing a fund’s (or company’s) intangible assets by attempting to allocate a fixed value to them that won’t change according to the fund’s (or company’s) market value.