I remember the first time I came across BVPS. Everyone seemed to swoon over its simplicity, the so-called “Book Value Per Share” looked like the holy grail of determining a stock’s intrinsic value. But let me tell you, BVPS isn’t all that it’s cracked up to be. Relying too heavily on it can lead to some serious pitfalls, which I’ve seen happen time and time again. Let me break this down.
Consider a company with a BVPS of $10. That might seem like a decent figure, especially if the stock is trading at $8. A no-brainer buy, right? Well, not so fast. The issue is that BVPS neglects intangible assets like brand value or intellectual property. Take Google, for instance. Do you think its BVPS would give a true reflection of its worth? Absolutely not. Google’s brand, algorithms, and user data can’t just be squeezed into a balance sheet figure.
A good case in point is Coca-Cola. In 2019, Coca-Cola’s BVPS was around $5, while its stock traded above $50. Does that mean investors were foolish? No. They understood the power of their brands, which don’t show up in BVPS. Focusing solely on BVPS would have made you miss out on over a 90% premium investors were willing to pay. Simply put, BVPS fails to capture these essential intangibles.
Next, think about the impact of depreciation and amortization. I had this friend who got burned by investing in a factory-heavy business with increasing BVPS. Guess what? The old machinery depreciated faster than new ones came in, reducing actual productivity and future earnings potential. He learned the hard way that BVPS glosses over quality and condition of physical assets.
Let’s also talk about the financial industry for a moment. When companies load up on debt, their BVPS might still look healthy if liabilities aren’t spiraling out of control. But I’ve seen too many companies with “decent” BVPS buckle under in high-interest environments. In 2008, Lehman Brothers boasted a solid BVPS prior to its colossal failure. Investors who only eyed BVPS faced substantial losses.
Moreover, BVPS gives you a snapshot in time, ignoring future growth potential. Suppose you analyze a tech startup with a modest BVPS. The number won’t reflect its R&D or market expansion prospects. Facebook in 2006 had a negligible BVPS but its real value lay in its user base and potential ad revenue. Fast forward to now, and missing that boat means missing out on massive gains.
Remember that high BVPS doesn’t necessarily indicate a reliable investment. I once read a story about an investor who bought into a company solely based on BVPS. The stock started tumbling because the company was embroiled in litigation, something that was completely absent in the BVPS metric. A high BVPS won’t magically save a company from external risks and bad management.
And it’s not just me saying this. Charlie Munger, Warren Buffett’s long-time business partner, has often disregarded book value metrics. Munger argues that book value often distorts the true financial health of a company, especially when management is focused on short-term results to prop up BVPS. This “window dressing” can lead to a false sense of security. Hardly a reliable gauge, right?
Ever heard of Goodwill impairment? It’s another pitfall BVPS doesn’t accommodate well. Companies acquiring other businesses often list “goodwill” on their balance sheets. These intangibles can be impaired, slashing BVPS overnight. Just look at Kraft Heinz in 2018, where they had to write down $15 billion in goodwill, basically gutting their BVPS.
Finally, this one is a bit personal. I knew someone who relied on BVPS to dive into oil stocks during the 2015 downturn. The oil companies boasted decent BVPS since their reserves booked values high. However, fluctuating oil prices and production costs weren’t something BVPS could account for. Long story short, BVPS painted a rosy picture, but the industry context told another story entirely.
So there it is, laid bare. While BVPS can provide some insight, it’s full of blind spots and should never be the sole metric you rely on for investment decisions.