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In the previous article, I talked about P/E ratio and how it provides an understanding of stock price in relation to its earnings. That article concluded that while it is helpful in determining if a stock is overpriced or not, it may not be wise to rely only on it in value investing.
I’m going to talk about book value and in this discussion, the shareholder’s equity. The goal is to let you know where to find this information and how you can use it to analyze value investing in Philippine corporations.
What is book value?
Book value (BV) or shareholder’s equity is what the company is worth. It is what remains after all the debts are paid. You can think of it as the result of adding up all of its assets and then deducting all its liabilities either the previous fiscal year or year-to-date (the past four quarters), and what you get is the value of the entire company.
It is also called shareholder’s equity because it’s what each holder of stocks is said to be entitled should the company closed shop and sold. (You may read this article for a discussion on equity.)
You can also think of shareholder’s equity when you buy a house. It is said that your home equity is whatever portion that you’ve already paid. Let’s say that the house is worth 2 million pesos, and you’ve already paid 500,000 pesos as down-payment and three months worth of mortgage. So your home equity is 1.5 million pesos (2 million – 500k).
So let’s say that a corporation has a total asset of 2 million pesos and liabilities of 1.5 million pesos. The book value/shareholder’s equity is the remaining 500,000.
For a big corporation, the figures could run into millions or even billions so it can be quite unwieldy to use. Besides, it tells a limited information. It does not inform the equity that each individual shareholder is said to be entitled. Said in another way, you don’t know really how much you deserve out from a company that you invested in.
That’s why book value per share (BVPS) is more meaningful. It breaks down the book value by dividing it with the total number of shares. The result is a peso amount of shareholder equity for each of the share owned.
With the example above, the book value is 500,000 pesos. If there are 100,000 shares held by all investors, then BVPS is 5 pesos per share.
One way to look at the idea of BVPS is to consider that for every share that you own, the company is actually worth 5 pesos.
You would be correct in thinking that it is like the net asset value per share (NAVPS) in mutual funds or the net asset value per unit (NAVPU) for unit investment trust funds (UITF), PERA, and VUL investments.
However, it is also unlike the two because NAVPS and NAVPU determine the value of your mutual fund or UITF investment. In stocks, the market price (that is the peso amount that investors are willing to pay to buy the stock) may be lower or higher than BVPS.
The book value and the book value per share can be found on the company’s balance sheet.
Similar to the discussion on earnings-per-share (EPS) and price-to-earnings ratio (P/E or PER), BVPS can be used to describe the company in terms of its current market price. This is where P/BV or P/BVPS or price-to-book-value/price-to-book-value-per-share comes in handy. It is simply a ratio between the market price and the book value per share.
There are two ways that you can find P/BV of any company. One is to manually compute it. Just search for the current price of any stock and the company’s updated BVPS.
Or you may find this information from your broker, Philippine Stock Exchange, Bloomberg, Wall Street Journal and other related investment websites.
Why use P/BV?
Just like price-to-earnings ratio, the P/BV is used when you’re trying to decide to buy two similar companies. The first thing you’re going to do is to actually compare which of the two has a price is cheaper relative to its value when liquidated.
So let’s say that Company X is being sold for 1 million pesos and Company Y is sold for 2 million pesos. Based on this information alone, it’s clear that Company X looks like a bargain than Company Y. But what if there’s a reason Company X is sold at half the price?
The P/BV is a way to understand whether there is good reason for the price that companies are offering you. It ties the price to what the company is actually worth if all the assets are sold and debts are paid. After all, you wouldn’t want to buy something that in reality has little or no worth at all.
Suppose that Company X has book value of 500,000 pesos and Company Y has book value of 1.5 million pesos. Breaking down the details, we have the following table.
From the table, you can see that Company X is sold at a price that is twice its book value. In comparison, Company Y is sold at 1.33 times its book value. It is clear that Company Y actually offers more value for your money.
Why? Because you can interpret this data as investing only 1.33 pesos to acquire a business that gives 1 peso worth of company assets. Compare that to Company X where you have to invest 2 pesos in order to get a business that’s worth 1 peso. The lower the P/BV, the closer it is to its worth as reported in the company’s books.
The first purpose of BVPS is to understand the value of the company upon liquidation. It’s not that investors are a pessimistic bunch that they’re always thinking that corporations would go bankrupt. The BVPS is just a yardstick to consider before buying shares or even when purchasing an entire company.
It can also be an indicator whether the stock is overvalued or undervalued. It offers a quick check whether the selling price of an entire company is higher or closer to its market price.
If the stock is trading higher than the BVPS, then it is said that the investors are paying a premium (that is, they’re paying more) on the stock. If the stock is trading lower than the BVPS, then it is said that investors are paying it on a discount.
For value investors, it provides another way to determine the intrinsic value of the business. So it can be utilized with other indicators such as price-to-earnings ratio, price-to-book-value ratio, and return on equity (ROE). Don’t worry, I’ll make separate articles that explain each of these concepts. Once the intrinsic value is determined, value investors can then check which of the stocks are being traded on a premium or on discount.
The list below shows the book value per share of the top 30 Philippine companies. Data is updated October 2019.
|ABOITIZ EQUITY VENTURES, INC.||AEV||54.50||29.29||1.8609|
|ALLIANCE GLOBAL GROUP, INC.||AGI||11.28||17.81||0.6335|
|AYALA LAND, INC.||ALI||46.20||13.46||3.432|
|ABOITIZ POWER CORP.||AP||36.65||16.03||2.2858|
|BDO UNIBANK, INC.||BDO||143.50||78.60||1.8258|
|BLOOMBERRY RESORTS CORPORATION||BLOOM||10.92||3.56||3.0712|
|BANK OF THE PHILIPPINE ISLANDS||BPI||93.00||57.66||1.6129|
|DMCI HOLDINGS, INC.||DMC||8.44||5.94||1.4213|
|FIRST GEN CORPORATION||FGEN||24.40||27.60||0.8842|
|GLOBE TELECOM, INC.||GLO||1,783.00||578.58||3.0817|
|GT CAPITAL HOLDINGS, INC.||GTCAP||840.00||714.22||1.1761|
|INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.||ICT||121.00||38.52||3.1415|
|JOLLIBEE FOODS CORPORATION||JFC||220.20||45.72||4.8164|
|JG SUMMIT HOLDINGS, INC.||JGS||70.00||41.30||1.6951|
|LT GROUP, INC.||LTG||13.70||16.70||0.8202|
|METROPOLITAN BANK & TRUST COMPANY||MBT||68.00||74.50||0.9128|
|MANILA ELECTRIC COMPANY||MER||367.00||73.44||4.9974|
|METRO PACIFIC INVESTMENTS CORPORATION||MPI||4.91||5.64||0.8709|
|PUREGOLD PRICE CLUB, INC.||PGOLD||38.40||20.87||1.8398|
|ROBINSONS LAND CORPORATION||RLC||24.40||18.28||1.3351|
|ROBINSONS RETAIL HOLDINGS, INC.||RRHI||76.00||44.26||1.717|
|Semirara Mining and Power Corporation||SCC||21.85||9.51||2.2975|
|SECURITY BANK CORPORATION||SECB||197.90||151.86||1.3032|
|SM INVESTMENTS CORPORATION||SM||990.00||306.59||3.2291|
|SAN MIGUEL CORPORATION||SMC||164.00||139.41||1.1764|
|SM PRIME HOLDINGS, INC.||SMPH||37.75||9.84||3.8383|
|UNIVERSAL ROBINA CORPORATION||URC||157.70||37.57||4.1975|
Limits of BVPS
The book value can be inflated.
There are many ways that book value can be inflated. Companies may treat different accounting items as either asset or debt and in so doing, they can actually show a higher value without necessarily the value being reflected on the business.
Buyback program inflates BVPS.
When companies buy stocks from the market, the result is that there are fewer shares and BVPS increases. Again, this is a situation where there is a change in an indicator without really reflecting a corresponding change in the business.
BVPS and P/BV are historical.
Just like the price-to-earnings ratio, BVPS is historical. It takes into account the past performance of the corporation. It does not capture its growth potential or forecast.
Some corporations are asset-rich.
Businesses are not created equal. Some would require large capital outlay to buy assets such as factories, buildings, etc. Others though such as technology firms may not require these things to operate and they might be growing at a faster rate. So BVPS alone is not a reliable indicator and shouldn’t be used in isolation of other factors.