What if book value is more than share price?

Nominal value example

Tobin’s Q, so called because it was introduced in 1969 by the American economist James Tobin, who received the Nobel Prize in 1981 for his disruptive analysis of financial markets and their relationship to spending decisions, employment, production and prices.

This indicator shows the relationship between the closing price of the asset on the stock exchange with the book price. In other words, how many times the market recognizes the asset’s equity value. If the stock is overvalued, the Tobin Q will be greater than 1 and if it is undervalued, the indicator will be less than 1.

In fact, the average target price recorded by Bloomberg for Sura’s common stock is $28,720, more than $3,500 above the stock’s close before its suspension. The same happens with the average target price for the preferred stock, $28,800.

A different case happens with Grupo Nutresa’s stock. After the resumption in its trading, the stock has increased 6.5% to $28,500 on the BVC, a price that is above its book value of $18,088.18. Tobin’s Q is higher than the previous ones, at 1.59. The BVC share price also exceeds Bloomberg’s average target of $28,029.

Nominal value and real value

A value criterion is one that tries to determine whether a stock is undervalued or not, i.e. whether the price at which it is quoted is below its real value. One of the most widespread value criteria in the stock market world is that which compares the price of a share with its book value.

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According to this selection criterion, a company whose shares are trading 20% below its book value should have a significant upside. If that difference were 50%, it would mean that the price could double if it were to equal book value.

We can see the results of such a strategy in column 7 of the following table. As can be seen, it would have produced an overall return at the end of the period only slightly better than the benchmark average and very close to that of the IBEX-35 index.

Par value of shares

When starting out in equity investing, it is common to confuse the concepts of “par value”, “book value” and “price” per share. Today is a great day to learn what each is, so why not take advantage of it? Let’s first look at what par value and book value are, and then how you can use them to value shares and buy or sell at a good price.

The nominal value of a share is equivalent to its value at the time of issue. For example, if you set up a company with your neighbor and you each contribute €2,000, the company will have assets of €4,000. You can decide to divide this equity into as many shares as you want, for example, 20 shares with a nominal value of 200 €.

You can also decide to divide it into 2000 shares with a nominal value of 20 €; you know that the cake does not grow by dividing it into more pieces. The company will always have an equity of 4000 €, no matter how you split it.

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Book value and market value? of an asset

Book value can be used as an indicator of how overvalued or undervalued a stock is. In fact, some investment systems or philosophies such as “Value Investing” look for, among other ratios, those shares whose trading price is lower or similar to their book value, since it is assumed that if this occurs and there is no explanation to justify it (such as poor expectations regarding the future of the company or its results) or such explanation is unfounded or overestimated, the shares are trading at a low price.

With the IPOs of the savings banks (Bankia, Banca Cívica, etc.) already transformed into banks, we are constantly hearing that if they go public at 0.4 the book value, if at 0.5… That is, for example, that Bankia during its IPO process was going to go public at a discount of 50% or more to the book value of its equity.

We also leave you another recommendation on company valuation. It is the book by IESE professor Pablo Fernández. The title of the book is: “Company Valuation. How to Measure and Manage Value Creation.”

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