what is book value per share ?

Savvy investors are always on the lookout for stocks that are not fully valuedor, still better, are grossly undervalued. An important measure of value is the book value per share-total assets minus intangible assets and liabilities divided by the number of outstanding shares. If the price-to book value per share is less than one, it means the stock is trading below its book value.

But does this in itself make the stock a good investment? Not necessarily. For, experts say that the price-to-book value indicates just whether the stock is undervalued or overvalued, and has to be seen with other factors such as the company's earnings record. However, for most investors, it's a good starting point to look for undervalued stocks.

AN INDICATOR

Put simply, book value represents that part of the accounting value of a business that will be left after debts are paid off. You can arrive at the figure by deducting liabilities from assets (he will be left with shareholders' equity). Dividing this by the number of shares will give the book value per share.

"When compared with the market value, book value can indicate whether a stock is overvalued or undervalued. For companies with negative earnings which cannot be valued using the price-to-earnings ratio, the price-to-book value multiple can be used, especially for relative comparison, as the number of companies with negative book value is far less than the number of companies with negative earnings

"It is useful when earnings are low and the price-to-earnings multiple does not reflect the business's true worth. It is especially suited for valuing capital-intensive industries,"

Some big companies that are trading below book values are Tata Steel, Steel Authority of India, Reliance Communications

BUT WHY?

A stock may trade below its book value for several reasons, the foremost being lack of investor confidence in the company's future. If it is widely believed that the company's performance will deteriorate, its stock will possibly trade at a discount to its book value. Another reason could be belief that the company is adopting aggressive accounting policies to bloat its net worth.

SHOULD YOU BUY?

Book value should not be seen in isolation. This is because many companies create revaluation reserves to inflate book value. Many also raise equity at a substantial premium. Investors should adjust for these factors.

Also, in industries such as information technology, where the requirement for capital is low, the book value tends to be low. This does not mean that they do not offer value.

Ideally, while deciding to invest in a capital intensive industry, the investor needs to ascertain if the current market price is less than the assets' replacement cost or book value.