Book value per share cagr - is this a worthwhile filter?


When assessing shares, I tend to look at this metric (after factoring in dividends paid), which is the compound annual growth rate (cagr) in book value per share. I look at it also in conjunction with the share count cagr.

The reasons being;

  • it shows the degree to which share dilution waters down any absolute increase in profit (when compared to the company net book value cagr).

  • to my mind it reveals the cost of share options (which, I think, go through company reserves under current accounting regulations, by-passing the P&L but still reducing book value)

  • it helps to highlight the true difference between company adjusted profits and reported profits (it’s interesting that many director remuneration schemes are based on company adjusted profits, rather than reported profits! :slight_smile: ). For instance the company may be reporting a hefty adjusted profit for many years, but book value per share remains the same or decreases.

Assuming I go through the profit adjustments to check their validity, how would this process still miss good opportunities in companies which report large profits but have flat or negative book value cagr per share? If so, which types of company could I be missing out on?

On the subject of adjusting profit items, perhaps intangible write-offs should not inflate operating profit to get to company adjusted profits - they represent cash the company has spent and hasn’t hit the p&l until it is written off there (the directors are clearly happy enough to reflect the incremental revenue from the purchase in the p&l, after all)?



Hi Ben,

Could be me, but I don’t follow everything you have written here :frowning:

So are you comparing book value per share (with dividends added back?) to net book value per share?

Share-based payment charges do go through the P&L but are actually ‘written back’ through the reserves to increase book value. Share-option accounting is not straightforward and I think the easiest way to identify their declared cost is to find the relevant P&L entry and go from there.

Yes, I can see this working. Book value is up say, 5p per share, while adjusted retained earnings over the same time come to, say 15p per share, which means 10p per share is unaccounted for. Profit adjustments should be the most likely cause, although book value can be affected by various direct changes (such as pension scheme movements).

If you adjust for dividends, you may have to adjust for buybacks as well, or your filter may overlook hefty share repurchasers such as Rightmove. I can’t think of an obvious situation where a company is reporting genuine large profits but its book value is flat or decreasing, other than through unusual direct-to-reserves movements or issuing loads of new shares.

A murky subject this and all depends on the intangible involved. Internal software-development intangibles for example should not be treated as an adjusting item to arrive at an adjusted operating profit.

But what about intangibles that were acquired through an acquisition? Yes there was a cash cost, but any goodwill created through the same acquisition is not amortised against earnings – even though that goodwill had a cash cost as well.

So there is some inconsistency in the acquisition/intangible accounting rules, and most companies perhaps understandably exclude ‘amortisation of acquired intangibles’ from their adjusted profits as they believe the acquired intangibles should hold their value. All this leads on to a very messy subject of whether the entire acquisition cost should be expensed through the P&L!


1 Like

Apologies for my garbled mutterings. I’m no wordsmith!

Just factoring in that book value per share will be reduced by dividends paid, but those dividends do benefit the investor e.g. if nbv per share has increased by 2% p.a. and if the dividends paid were around 3%, then this company is roughly the equivalent of a company which achieved a 5% increase in book value p.a. but paid no dividend.

Ok. Thanks.

I’ll just have to adjust roce downwards or use operating profit, I guess, if companies adjust profit upwards for intangibles written-off. Management shouldn’t have it both ways i.e. an increased profit and an increased roce!

I will need to do more work when analysing companies in the future!!



1 Like

Ah, with ROCE, you should add back the cumulative intangible amortisation/write-offs to the denominator so as not to flatter the calculation and allow management to have it both ways. That way you get to see the profit return on the entire acquisition expenditure.


1 Like

Thanks Maynard

Ben, companies that do a lot of buybacks can really distort bvps. Look at a company like Moodys for instance which has had negative book value at times. These are the rare company’s that grow but requires very little additional capital to do so and use the cash they generate to retire equity from the business. It’s also distorted by m&a since companies acquiring capital light businesses that are worth far more than their physical assets will have large goodwill on their balance sheets.

Most companies with negative BV will have got there from operating losses, however, so as a broad approach its got some merits. It’s better for companies in asset heavy sectors like commodities and financials where there is a more meaningful connection between their market values and their book values.

OK. Thanks for stating the obvious (again).
Take care.

No problem Ben.
Happy to help and happy NY to you

Speaking as an erstwhile auditor, book value can be a trap. Who decides the book value? How can an auditor assess whether that book value is reasonable? As an example, the last time I remortgaged, the bank sent a surveyor who asked me what I thought my house was worth.

It’s a good metric but I suspect that cash-flow per share could be more revealing, as long as you look at reasons that make cash-flow variable, such as acquisitions, investment, lack of investment, squeezing creditors etc