Wednesday, August 31, 2011

Book Value of Shares

Buy shares of a growing companies at its book value and see your profit soaring in years to come
What is the value of an Investment?

One shall read balance sheet of a company to know the value of their investments. Value of investment means the work of the own funds of the company. Own funds are the money put in the company by its shareholders (by buying its shares).

How Book Value of a company is important to know the value of an investment?
To know the value of the investments, we shall study the book value of a company. Book value is the value of own funds of a company per share. To calculate the book value one shall divide the net worth (value of own funds) of a company by the number of shares in the market.

What is a Book Value of a share?
The book value of a company tells us what the each share of a company is worth. Means if you bought a share at Rs10, and its book value is Rs11, means you must buy that share. Also, assume that a company in its IPO offered shares at par of Rs 10 per share, and the present book value is Rs 24 per share, it means that the investment by the shareholders has appreciated by Rs 14 per share.
Book Value: How Investors can use it for investing?
We believe Book Valve and Price to Book Value Ratio is one best starting point of fundamental analysis of shares.

Accumulated assets of companies which includes short term assets, long term assets, inventory, investments etc. Good examples of assets are like Real Estate, Manufacturing Equipments (minus depreciation), Finished Good Investory, Raw Materials, other investory (like spares etc), share holdings of other companies, bonds etc. Ideally speaking any thing of value which can be sold at later date (if point of liquidation is reached) which included everything right down to a piece of pen shall contribute to the calculation of book value.

Value of total assets divided by total number of shares outstanding in the market gives the most usable figure for the investors called as book value per share. This book value per share can be compared with market price of shares for the purpose of fundamental analysis of shares.

Market Price of share divided by book value per share is a very useful ratio for the investors (P/B). If this ratio has value less then one it means that the share is currently tarded in the market at price lower than the book value. It means that the share is undervalued. But it is also important for investors to analyze that why market price of share is traded at value less than book value per share.

Either stock market is falling due to global slowdown, or a particular sector in consideration is not doing well, or the company is facing bankruptcy. But another probability is that the company is publishing wrong book value figures to confuse and mislead the investors. This type of situation is very much possible unless otherwise why value investors (who always has great eye for undervalued share) will not have already started buying that share and push the prices close to book value or higher.

How book value of a share is related to its market value?
If all investors become financially intelligent, no one will buy a share at a price more than its book value. Means is book value will show that the share of a company is worth Rs100, no body will buy it at Rs.150. In other words the market value of share will be equal to the book value. But, if a company is doing hard for modernization and expansion of its business, it indicates that the turnover and profit of this company is going to improve in future.

Then the investors gambles with an expectation of future benefits. In this case investors may agree to buy shares by paying more than its book value. Therefore, it is possible for the market price to be more than the book value if investors think that the company has growth potential and they have confidence that the company is likely to perform better than it is doing at present.

How can the Book Value of company guide us in buying a share?
Some times the book value of a company exceeds its market value. A company which is performing reasonably it will have a good book value. It may be because of the global meltdown, lower market demands, low market capitalization and reach, or fierce competition, the investors may have ignored this share. This will lead to a lower market value than its book value. Such shares will be a very good buy for future gains.

List of book value of shares of top 100 stocks of India

SLNameBook Value As on Feb’11
2Reliance Industries Limited392.21
3State Bank of India1038.57
4NTPC Limited77.28
5Bharti Airtel Limited96.24
7Infosys Technologies Limited383.82
8Tata Steel Limited412.14
9Reliance Communications Ltd.244.66
10Tata Consultancy Services Limited72.72
11NMDC Limited36.00
12ICICI Bank Limited448.62
13Larsen & Toubro Limited300.5
14ITC Limited18.14
17Bank of India242.41
18Wipro Limited70.97
19Indian Oil Corporation Limited208.21
20GAIL (India) Limited132.43
21Hindustan Zinc Limited42.89
22Hindustan Unilever Limited11.84
23Housing Development Finance Corporation103.7
24HDFC Bank Limited463.66
25Hindalco Industries Limited145.78
26Bank of Baroda413.27
27Canara Bank305.83
28Power Finance Corporation Limited108.00
29Sesa Goa Limited83.88
30Axis Bank Ltd.391.2
31Union Bank of India174.37
32Satyam Computer Services Limited63.41
33Power Grid Corporation of India Limited35.00
34Grasim Industries Limited778.18
35DLF Limited75.58
36Jindal Steel & Power Limited72.21
37Ambuja Cements Ltd.47.9
38Great Eastern Shipping Company Limited323.61
39Indian Overseas Bank109.06
40Hero Honda Motors Limited173.52
41National Aluminium Company Limited151.63
43Sun Pharmaceutical Industries Limited55.22
44Indian Bank127.52
45Sterlite Industries India Limited66.15
46Maruti Suzuki India Ltd409.64
47ACC Limited320.11
48Mangalore Refinery & Petrochemicals Ltd.26.93
49Reliance Infrastructure Ltd527.18
50NHPC Limited18.92
51Idea Cellular Limited34.56
52Tata Motors Limited237.37
53HCL Technologies Limited72.06
54Tech Mahindra Limited153.82
55Videocon Industries Ltd.294.25
56UltraTech Cement Ltd.173.56
57Reliance Capital Limited282.7
58Oscar Investments Ltd.747.8
59The Shipping Corporation of India Ltd.146.61
60Tata Power Company Limited443.83
61Syndicate Bank Ltd.88.03
62Oriental Bank of Commerce257.54
63Jaiprakash Associates Limited38.55
64IDBI Bank Limited86.2
65Mahindra & Mahindra Limited93.61
66Neyveli Lignite Corporation Limited61.54
67Corporation Bank341.36
68Container Corporation of India Limited331.61
69Cipla Limited73.55
70Allahabad Bank131
72Bharat Electronics Limited543.21
73Unitech Limited12.61
74Infrastructure Development Finance Co.64.89
75Bharat Petroleum Corporation Ltd361.97
76Oracle Financial Services Software Ltd.497.12
77EID Parry (India) Limited111.58
78IFCI Limited37.99
79Bajaj Auto Limited.101.2
80Andhra Bank75.2
81Bosch Limited1351.68
82Shriram Transport Finance Company Ltd.169.59
83State Bank Of Travancore449.98
84Siemens Limited103.11
85Indiabulls Financial Services Limited105.88
86Shree Cement Limited347.33
87GlaxoSmithKline Pharmaceuticals Limited227.95
88Hindustan Petroleum Corporation Limited316.87
89Dr. Reddy’s Laboratories Limited349.52
90UCO Bank Limited50.88
91ABB Limited (India)116.7
92Nestle India Limited145.2
93LIC Housing Finance Limited236.8
94Petronet LNG Ltd.26.45
95Tata Communications Limited238.53
96The Federal Bank Limited252.7
97Gujarat State Fertilizers & Chemicals242.36
98Coromadel International Limited80.36
99Mundra Port And Special Eco Zone Ltd.17.4
100C E S C Limited231.98
101Omax Autos Limited68.08
102Amtek Auto Limited.162.91

Book value can sometimes may not be exact reflective of all assets

Suppose you as an individual has taken a home loan. Against this loan you have key your existing property as a security. In case of your going bankrupt bank will cease this propoerty of yours. In the same way companies also take business loans from banks.

If the credit rating of company is not good then they keep their existing assets as guarantee and then take a loan. If the company goes bankrupt then bank will cease the guaranteed asset. While calculating the book value of company such information remains hidden, but company will declare these informations in finer footer notes.

There are few good companies are eligible for strong book value considerations while buying their shares. These companies has strong prospects of future book value appreciations.

(1) Big Blue Chip companies that has their own real estate property (in large numbers) to run its operations. Over a period of time the valuations of the real estate is only going to go up irrespective of the depreciatio effect. Take example of Mcdonalds whose business though is selling foods/ snacks but the volume of real estate property it own across the world is outstanding.

(2) The companies which has operations in other countries also has prospects of increasing the valuations of book value over time. The growth prospects may be better in other operating countries.

Generally in case of companies (like Mcdonalds) that holds great real estates in various companies do not have this advantage reflected in their book value. Because the present market valuation of the property cannot be reflected in the book value recorded in balance sheet. So investors solely relying on book value shall see that what real estate the company holds to get a feeling.

How you can easily calculate Book Value of Shares
Book Value = Equity Share Capital + Retained Earnings
Equity Share Capital = This value is very clearly mentioned in the Balance Sheet
Retained Earnings = The retained earnings (cumulative) is also clearly mentioned in the balance sheet

Lets Take Example of Reliance Communication (RCOM)
Equity Share Capital (as on Mar’11) = Rs 1032 Cr.
Retained Earnings/ Reserves = Rs 49,466 Cr.
Book Value = Rs 1032 + Rs 49,466 = Rs 50,498 Cr.
No of Shares Outstanding = 206 Cr. Nos
Book Value per share = Rs 245 per share
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