Book value per share of stock is a corporation's total stockholders' equity, with any preferred stock claims subtracted out first, divided by the number of common shares outstanding. It expresses the company's overall book value on a per-share basis, letting a common shareholder see roughly how much accounting net worth each individual share theoretically represents.
Why preferred stock is subtracted first
Preferred shareholders generally have a claim on a company's assets ahead of common shareholders, both for dividends and in liquidation, so their stake has to be removed from total equity before dividing by common shares outstanding; otherwise the resulting per-share figure would overstate what common shareholders are actually entitled to. If preferred stock is cumulative and carries unpaid dividends in arrears, those unpaid amounts are also typically deducted along with the preferred stock's own par or liquidation value before the remaining equity is divided among common shares.
How it is calculated
The formula is (total stockholders' equity minus preferred stock claims) divided by the number of common shares outstanding at the measurement date. A company with $50 million of total equity, $5 million of which belongs to preferred stock, and 9 million common shares outstanding has a book value per share of exactly $5.00, calculated as $45 million divided by 9 million shares.
Just as a company's overall book value diverges from its market value, book value per share typically diverges from the market price per share investors actually pay for a stock, sometimes dramatically. The ratio of market price to book value per share, known as the price-to-book ratio, is a widely used valuation metric, particularly for financial institutions and other asset-heavy businesses whose balance sheets more closely approximate fair value than a typical operating company's does.
Limitations of the measure
Because book value per share is built from historical cost accounting, it can understate a company's real per-share worth when valuable intangible assets, such as brand value or technology developed internally, are not recognized on the balance sheet at all, and it can overstate real worth when carried assets have lost value the books have not yet caught up to. Analysts therefore treat book value per share as one data point among several, rather than a standalone estimate of what a share is genuinely worth to a buyer today.
A simple worked example
A corporation with $36 million of total stockholders' equity, including $6 million attributable to preferred stock, and 10 million common shares outstanding has a book value per common share of $3.00, calculated as the remaining $30 million of common equity divided by 10 million shares. If the stock currently trades at $9.00 per share, its price-to-book ratio is 3.0, a figure investors would then compare against similar companies in the same industry.
Why preferred stock is excluded
The calculation specifically excludes any claim preferred stockholders have on the company's equity, because preferred shareholders generally rank ahead of common shareholders in both dividends and liquidation, meaning their stated or liquidation value has to be subtracted from total stockholders' equity before dividing by common shares outstanding. Skipping this step would overstate what common shareholders are actually entitled to, since some of the reported equity genuinely belongs to preferred holders first. Companies with no preferred stock outstanding at all can skip this adjustment entirely, which is why the formula is sometimes written more simply for those companies as total stockholders' equity divided by shares outstanding.