Essential financial indicators for stock investment: How to calculate net asset value per share and how to apply it in stock selection

Understanding Through Comparison: Book Value per Share vs. Earnings per Share

Many novice investors often confuse two important stock valuation tools—book value per share and earnings per share. To truly master stock selection methods, it’s essential to understand the fundamental differences between these two.

Earnings per share (EPS) measures a company’s profitability over a specific period, calculated as net profit minus preferred dividends divided by the number of common shares outstanding. Simply put, it reflects how much profit the company has generated for each shareholder.

Book value per share (NAVPS), on the other hand, represents the value of a company’s assets after deducting all liabilities, divided evenly among each share. It emphasizes the solidity of the asset base rather than profitability.

These two indicators are like a person’s “income” and “net assets”—high income doesn’t necessarily mean high net assets, and high net assets don’t guarantee a prosperous year.

How to Calculate Book Value per Share? Core Formula Analysis

Basic formula for book value per share:

Book value per share = Shareholders’ equity / Total outstanding shares

Expanding further, based on accounting principles:

Book value per share = (Total assets - Total liabilities) / Total outstanding shares

Or with more detailed components:

Book value per share = (Share capital + Capital surplus + Retained earnings + Unappropriated profits) / Total outstanding shares

Concrete example calculation:

Taking Uni-President (1216.TW) as an example, suppose the company’s total assets are NT$2.5 billion, total liabilities NT$1 billion, and there are 1 billion shares outstanding, then:

Book value per share = (2.5 - 1) / 1 = NT$1.5

If the individual asset items are known—share capital NT$700 million, capital surplus NT$400 million, retained earnings NT$300 million, unappropriated profits NT$100 million, with 1 billion shares outstanding—the result is the same:

Book value per share = (700 + 400 + 300 + 100) / 1,000,000,000 = NT$1.5

Is a Higher Book Value per Share Better? Three Common Misconceptions

Misconception 1: A high or low net value directly correlates with stock price movements

Stock prices are fundamentally determined by discounted future cash flows, while book value is merely an accounting figure on the company’s balance sheet. There is no inherent positive correlation between the two.

When a company profits year after year, total assets increase, and net value naturally rises; conversely, consistent losses lead to a decline. However, an increase in net value doesn’t necessarily mean the stock price will rise accordingly. Market sentiment, industry outlook, company competitiveness, and investor expectations all influence price movements; net value is just one factor.

Misconception 2: Changes in net value always reflect operational results

Fluctuations in book value per share usually stem from two situations: one, actual changes in the company’s operational status; two, issuance of new shares or dividend distributions.

Investors must distinguish the reasons. If declining net value results from poor management, such stocks warrant caution; but if caused by issuing new shares, the change in net value doesn’t reflect the company’s true operational prospects, as the efficiency of capital utilization still needs observation. Similarly, if a company issues bonus shares proportionally, diluting net value, it doesn’t necessarily indicate deteriorating operations.

Misconception 3: High net value makes a stock worth investing in

Different industries have vastly different capital structures, so the significance of net value varies greatly.

In capital-intensive industries like manufacturing, agriculture, and heavy industry, book value per share is an important indicator because profits are directly derived from tangible assets. However, in service sectors, software, and creative industries—relying heavily on intangible assets and talent—book value per share is less relevant. For example, tech giants like NVIDIA, Netflix, and Microsoft may have relatively low book values per share, but due to their strong market positions and sustained profitability, their stocks are still far more valuable than traditional companies with higher net value but stagnant growth.

Therefore, blindly pursuing higher net value can cause missed investment opportunities.

Practical Application of Book Value per Share

Assessing a company’s financial health

Book value per share reflects the accumulated results of long-term operations and forms the asset foundation supporting the stock price. A larger net value indicates greater wealth per share, and the company’s profitability and risk-bearing capacity are stronger.

Under the premise of no major financial issues, comparing stock prices to net value across different periods can roughly judge whether the current price is overvalued or undervalued. If the stock price exceeds net value, it suggests overvaluation and a higher purchase cost; if below, it indicates undervaluation and a relatively attractive price.

Understanding the present value of shareholders’ equity

Based on the logic of net value calculation, with the total number of shares unchanged, the size of net value depends entirely on shareholders’ equity (assets minus liabilities). The higher the book value per share, the more each shareholder could theoretically receive in a bankruptcy liquidation.

Note that actual liquidation value is often lower than book value due to factors like depreciation of fixed assets, which further reduces the proceeds.

An effective tool for industry comparison

Within the same industry, comparing net value can effectively assess relative investment value. For example, in banking, real estate, and heavy industries, companies with higher net value generally have stronger debt repayment ability and asset scale advantages.

Price-to-Book Ratio (PBR): From Net Value to Stock Selection

Definition and calculation of PBR:

PBR = Market capitalization / Book value per share

It measures how much the market is willing to pay above the company’s net assets.

Judgment criteria:

A lower PBR indicates a relatively cheap stock with potentially lower risk; a higher PBR suggests a more expensive stock with market expectations of higher future growth.

However, a low PBR doesn’t automatically mean it’s a good investment. This indicator must be combined with a company’s financial health, management capability, industry characteristics, and economic cycle for comprehensive evaluation.

Application scenarios:

PBR is most suitable for cross-company industry comparisons or tracking relative valuation changes over time within the same company. For cyclical stocks (like shipping, steel, coal, energy, cement, construction, automotive, finance), PBR is an important valuation reference.

For example, if a stock’s historical PBR remains between 1.6 and 2.5, a PBR below 1.6 may be considered relatively cheap; but if PBR continues to decline, caution is warranted as the company might be facing recession.

Note that PBR ranges vary significantly across industries; cross-industry comparisons are meaningless.

Case Studies of Quality Stocks: Industry-specific Net Value Applications

Taiwan stocks:

TSMC (2330), as the global leader in wafer foundry, is known for its advanced technology, with a PBR around 4.29—relatively high but consistent with tech industry traits. Formosa Plastics (6505), a major player in petrochemicals, has a PBR about 2.45, typical of capital-intensive industries. Taiwan Mobile (3045), a telecom giant, has a PBR around 3.29, supported by stable cash flow.

U.S. stocks:

JPMorgan Chase, a leading global financial institution, has a PBR around 1.94—an appropriate level for financial stocks. Ford Motor (F), a traditional automaker, has a PBR about 1.19, reflecting cyclical undervaluation. General Electric (GE), a diversified industrial conglomerate, has a PBR around 0.70, indicating market caution during its transformation period.

How to Check and Calculate Book Value per Share

Method 1: Online platforms

Most stock trading platforms and financial websites display book value per share directly in the basic info section. Common sites include financial statement platforms—enter the stock code for instant data.

Method 2: Calculating from financial reports

Obtain the latest annual or quarterly report, locate total assets, total liabilities, and share capital in the balance sheet and cash flow statement, then apply the formula. For example, Uni-President’s 2017 report:

Book value per share = (414,655,454 - 254,606,345) / 56,820,154 ≈ NT$2.8

This method allows deeper understanding of the company’s financial structure and potential risks.

Final Thoughts on Investment Decisions

Book value per share is an important reference for stock valuation but not the sole criterion. It is suitable for asset-heavy industries; for tech and innovative companies driven by intangible assets, its significance is limited.

Applying net value indicators reasonably, combined with profitability, growth potential, and industry outlook analysis, leads to more accurate investment decisions. Blindly pursuing higher net value alone can cause you to miss many truly promising investment opportunities.