When investors analyze a common stock, they primarily focus on its market value, or price. But you should also be aware of a common stock’s accounting, or book, value. This value represents the claim stockholders have on a company’s assets based on the accounting information on its balance sheet. Because a balance sheet includes only historical information, book value typically differs from a stock’s market value, which includes investors’ expectations about a company’s future. Book value alone reveals limited information about a stock, but you can gain insight into investors’ sentiments by comparing book value to market value.
Step 1
Download a company’s most recent Form 10-Q quarterly report or Form 10-K annual report from the investor relations section of its website or from the U.S. Securities and Exchange Commission’s online EDGAR database.
Step 2
Locate the balance sheet in the financial report. Identify the amount of the company’s total stockholders’ equity and the number of common shares outstanding in the stockholders’ equity section of the balance sheet. For example, assume a company has $760 million in total stockholders’ equity and 100 million common shares outstanding.
Step 3
Check if the company lists preferred stock in the stockholders’ equity section. If it does, identify the number of preferred shares outstanding. In this example, assume the company has 1 million preferred shares outstanding.
Step 4
Find the call price per share of preferred stock and the amount of dividends per share in arrears, if any, in the footnotes to the financial statements in the financial report. The call price is the amount a company must pay preferred shareholders if it buys back its preferred shares. If the preferred shares do not have a call price, find the par value per share instead. Dividends in arrears are those the company owes preferred shareholders for missed dividend payments. In this example, assume the company’s preferred shares have a call price of $55 and have $5 of dividends in arrears.
Step 5
Add the dividends in arrears to the call price. Multiply your result by the number of preferred shares outstanding. In this example, add $55 and $5 to get $60. Multiply $60 by 1 million to get $60 million.
Step 6
Subtract your result from total stockholders’ equity to determine the book value of all of the company’s common stock. Divide that result by the number of common shares outstanding to determine the book value per share of common stock. Concluding the example, subtract $60 million from $760 million to get $700 million as the book value of all common stock. Divide $700 million by 100 million to get a $7 book value per share.
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Tips
- A market price that exceeds a stock’s book value per share means that investors place additional value on a company’s future earning potential. A book value that exceeds market value suggests that investors, in general, are pessimistic about a company’s future. For example, a book value of $7 and a market price of $15 suggest that investors are optimistic about the company.
- If a company has no preferred stock, its book value of all common stock equals its total stockholders’ equity.