Computation of book value per share

ADS Book Value per Share
Book value per share is the per share amount resulting from a company’s liquidation at amounts reported on its balance sheet. Book value is conventional terminology referring to net asset value that is, total assets reduced by claims against them. The book value of common stock is equal to the total assets less liabilities and claims of securities senior to common stock (such as preferred stock) at amounts reported on the balance sheet (but can also include unbooked claims of senior securities). A simple means of computing book value is to add up the common stock equity accounts and reduce this total by any senior claims not reflected in the balance sheet (including preferred stock dividend arrearages, liquidation premiums, or other asset preferences to which preferred shares are entitled).

The shareholders’ equity section of Kimberly Corp. for periods ending in Years 4 and 5 is reproduced here as an example of the measurement of book value per share:

Relevance of Book Value per Share
Book value plays an important role in analysis of financial statements. Applications can
include the following:

• Book value, with potential adjustments, is frequently used in assessing merger terms.
• Analysis of companies composed of mainly liquid assets (finance, investment, insurance, and banking institutions) relies extensively on book values.
• Analysis of high-grade bonds and preferred stock attaches considerable importance to asset coverage.

These applications must recognize the accounting considerations entering into the
computation of book value per share such as the following:

• Carrying values of assets, particularly long-lived assets like property, plant, and equipment, are usually reported at cost and can markedly differ from market values.
• Internally generated intangible assets often are not reflected in book value, nor are contingent assets with a reasonable probability of occurrence

Also, other adjustments often are necessary. For example, if preferred stock has characteristicsof debt, it is appropriate to treat it as debt at the prevailing interest rate. In short, book value is a valuable analytical tool, but we must apply it with discrimination and understanding.
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