What is Book Value Per Common Share?

Definition

Net Asset Value Per Share (NAVPS) is a method of calculating a company's net asset value per share based on the equity of common shareholders. The company's net assets are the difference between its total assets and total liabilities, rather than its market price. If a company is liquidated, NAVPS represents the dollar value remaining for common shareholders after all assets are liquidated and all creditors are paid.

Origin

The concept of NAVPS originated in the fields of accounting and financial analysis, aimed at providing investors with a metric to assess a company's financial health. As financial reporting standards became more standardized, this metric gradually became an important tool for evaluating company value.

Categories and Features

NAVPS is typically used to assess a company's intrinsic value. The calculation formula is: NAVPS = (Total Assets - Total Liabilities) / Number of Outstanding Shares. A key feature of this metric is that it is not affected by market fluctuations, as it is based on the company's book value rather than market price. The advantage is that it provides a relatively stable standard for evaluating company value, but the disadvantage is that it may underestimate the company's future growth potential.

Case Studies

During the 2008 financial crisis, many investors used NAVPS to assess the financial health of banks and financial institutions. For example, Citigroup's NAVPS significantly declined during the crisis, reflecting the stress on its balance sheet. Another example is Berkshire Hathaway, where NAVPS has been used by investors as an indicator to evaluate its long-term investment value.

Common Issues

Common issues investors face when using NAVPS include: How to correctly interpret this metric? It is important to note that NAVPS does not reflect the company's market value or future profitability. Additionally, some companies may adjust their balance sheets through accounting practices, affecting the accuracy of NAVPS.