Are you considering purchasing stock in a company but aren’t sure how to value it?
For the price per share of a stock to be informative, it needs to be relative to or “in relationship with” something else — such as its earnings, book value, or countless other measures. The first step is to understand these basic measures.
Market Value (a.k.a., Market Capitalization) Per Share: Calculated by taking the total number of shares outstanding and multiplying it by the price per share. If a company has a market value of $500 million and has 5,000,000 shares outstanding, the market value per share is $100 per share (which is also the price per share).
Book Value Per Share: Calculated by subtracting total assets from total liabilities — (a.k.a., net worth). If a company has total assets of $600 million and total liabilities of $300 million, its book value is $300 million. If the company has 5,000,000 shares outstanding, it has book value per share of $60 per share.
Annual Earnings Per Share: Calculated by dividing annual earnings (net income) by the total number of shares outstanding. If a company earns $15 million and has 5,000,000 shares outstanding, its earnings per share is $3 per share.
Dividend Per Share: Calculated by dividing the annual dividend (amount of earnings paid to shareholders) by total number of shares outstanding. If a company pays $7.5 million in dividends and has 5,000,000 shares outstanding, its dividend per share is $1.50.
Tomorrow, we’ll expand on these ideas and take them one step further.