Book Value Per Share – More Useful Than Earnings Per Share?

by The Graham Investor on March 1, 2007

Ben Graham and latterly Warren Buffett swear by book value per share  (sometimes referred to as net asset value or asset value) as a useful if not the most useful measure of a company as a potential investment.

Many investors misunderstand Graham and Buffett by considering only static book value, much in the same way that they may look at the Price/Earnings ratio in isolation at a particular point in time.

A far better and more dynamic approach is to observe the growth (or decline as the case may be) in a company’s book value over a period of  time. There are several reasons why such an approach is a better measurement of growth and predictor of future growth than EPS.

For one thing, companies may resort to short-term decision-making to boost quarterly EPS. They may resort to accounting shenanigans – though perhaps not so much in a post-Enron Sarbanes Oxley world – or make charges against earnings in order to sweep the results of bad management decisions under the carpet. But book value is a long-term thing and cannot be easily hidden.

Finding historical book values is somewhat difficult even if you Google it, but here are some ideas. Morningstar shows 10 years of price/book values and 4 years of percentage growth in book value. To see the 4 year percentage growth, go to  Morningstar, type in a ticker in the “Quotes” field directly under the red Morningstar logo and hit Enter on your keyboard. This takes you to a quote page. Next click on “Snapshot” in the menu on the left hand side, and on the Snapshot page click the “Growth” tab. You will see the line of 4 years “Book Value/Share %”. Ideally you want to see it growing or at least in positive double-digit figures.

You can then enter another ticker in the Quotes field and hit the Enter key and it will take you to the Growth page for that ticker.

To see the 10 years of Price/Book values, click on Valuation Ratios in the left hand menu, and then the “10-Yr Valuation” tab. Since this is a ratio it’s not nearly as helpful as the % growth because you need a chart to see how the share price performed over the same 10 year period. Generally, you would use these figures to see how the Price/Book ranged over the 10 year period for a particular stock and conclude what the bottom end of the range should be, in order to buy when the Price/Book is near the bottom of its historic range. After all, a “low” Price/Book ratio in general terms, such as that entered into a stock screener, may not be particularly low for a particular stock.

As an alternative to digging up figures for book value growth, you can also  use our own Chart tool to generate a page of CAGR charts that includes a Shareholder Equity CAGR curve. Look for a consistent upward growth in Shareholder Equity, for example UNIT Corp. If you can find a stock that demonstrates a rate of growth in Shareholder Equity that is greater than the growth of the stock price over a similar period, then you may have found something of value.

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