Asset Value Per Share
Asset value per share is how much each company share would be worth if you sold everything the company owns. It’s a way to determine the company’s worth, even if the stock price is different. Knowing the asset value per share can help you decide whether buying the stock is a good deal.
Calculating Asset Value Per Share
To calculate asset value per share, first, you have to add up the value of everything the company owns. This includes stuff like:
- Cash the company has in the bank
- Property the company owns, like land, buildings, or equipment
- Inventory, which is products the company plans to sell
- Investments the company has made
- Money other people owe the company
This gives you the company’s total assets. But wait, the company probably owes some money, too, right? Yep, so next, you have to subtract all the money the company owes. This includes:
- Bills the company still has to pay
- Loans the company took out
- Bonds the company sold to borrow money
After subtracting all that, what’s left is the company’s net assets. These are the total value of everything the company truly owns, free and clear.
Dividing Net Assets by Shares Outstanding
Okay, so you know how much the whole company is worth. But how much is each share worth? To figure that out, you have to divide the company’s net assets by the total number of shares the company has issued. This number is called shares outstanding.
Let’s say a company has net assets of $100 million and has issued 10 million shares. To get the asset value per share, you’d do this:
$100 million net assets รท 10 million shares = $10 asset value per share
In this example, each share represents $10 worth of the company’s net assets. Pretty simple, right?
What Asset Value Per Share Tells You
Alright, so now you know how to calculate asset value per share. But why should you care? What does this number tell you?
Well, asset value per share gives you a baseline value for the company. It’s the bare minimum of what the company is worth. Even if the company never made another penny of profit, you’d think the stock should be worth at least this much since that’s the value of what the company owns.
If the stock price is way below asset value per share, that might mean the stock is undervalued – it could be a bargain, a chance to buy a piece of the company for less than what it’s worth.
On the flip side, if the stock price is much higher than the asset value per share, investors could think the company has great potential to grow and make money. They’re willing to pay more than the value of the company’s current assets because they expect the company to build more value over time.
Limitations of Asset Value Per Share
Now, asset value per share can be handy, but it’s not the whole story. It’s got some limitations you have to keep in mind:
First, the value of a company’s assets on paper might not be what you could sell them for. Maybe that factory isn’t worth as much as the company says because it’s old and run-down. Or perhaps those debts to the company will be burdensome to collect. The point is that asset values on a company’s balance sheet are estimates and might not reflect reality.
Also, asset value per share doesn’t tell you anything about a company’s ability to make money in the future. A company could have many valuable assets but still be losing money hand over fist. In that case, the stock might not be a great buy even if it looks cheap compared to asset value per share.
On the other hand, a company could have way more earning power than you’d expect just from looking at its assets. Maybe it has a killer brand, top-notch management, or some intellectual property worth way more than the physical stuff it owns. In cases like that, asset value per share could make the stock look overvalued even if it’s not.
Comparing Asset Value Per Share to Other Metrics
To get a sense of what a company is worth, you have to look at asset value per share alongside some other key metrics:
- Earnings per share tells you how much profit the company makes for each share. Higher earnings usually mean a higher stock price.
- The price-to-earnings ratio compares the stock price to earnings per share. It tells you how much investors will pay for each dollar of the company’s profits.
- Return on equity measures how efficiently the company turns shareholder investments into profits.
Looking at metrics like these and asset value per share can give you a complete picture of a company’s value and whether the stock price makes sense.
