Tuesday, February 14, 2017

How Book Value of Share Fall When EPS is Positive?

Even when the Earnings Per Share (EPS) is positive the book value per share can decrease in many different scenarios, as follows:
  1. Company had issued bonus shares;
  2. Company had issued fresh share capital for cash;
  3. Company had written down the assets for reasons of impairment in their value;

Scenario 1: Normal Case:

EPS is positive at Rs.15 per share. The net worth is Rs.5500 crores. There are 50 crore equity shares of Rs.10 each. The ‘Book Value Per Share’ is Rs.110.


Scenario 1
Numbers in Crores                     (1 Crore = 10 million)
Normal
Share Capital
500
Bonus Shares
0
New Shares Issued

Reserves
5000
Total Net Worth & Liabilities
5500
Face Value of Share
10
Number of Equity Shares
50
Book Value per Share
110


Net Profit for the year
750
EPS
15.00


Fixed Assets
5500
Cash in Hand
0
Total Assets
5500

Scenario 2: Bonus Shares were Issued:


Scenario 2
Numbers in Crores                     (1 Crore = 10 million)
Bonus Shares Issued
Share Capital
500
Bonus Shares
500
New Shares Issued

Reserves
5000
Total Net Worth & Liabilities
6000
Face Value of Share

Number of Equity Shares
100
Book Value per Share
60


Net Profit for the year
750
EPS
7.50


Fixed Assets
5500
Cash in Hand
0
Total Assets
5500

In this scenario all other things remain the same. The company had issued bonus shares in the proportion of 1:1 . The share capital had doubled. EPS is still postive but has halved (either in the same year or in the next financial year). The book value got eroded to Rs.60 per share from the previous Rs.110.

Scenario 3: Fresh Shares were Issued for cash:


Scenario 3
Numbers in Crores                     (1 Crore = 10 million)
Fresh Shares Issued
Share Capital
500
Bonus Shares
0
New Shares Issued
500
Reserves
5000
Total Net Worth & Liabilities
6000
Face Value of Share

Number of Equity Shares
100
Book Value per Share
60


Net Profit for the year
750
EPS
7.50


Fixed Assets
5500
Cash in Hand
500
Total Assets
6000

In this case too the number of shares and the share capital had doubled. The reserves are the same. Assets got increased by Rs.500 crores cash which is the proceeds of share sale. The book value got eroded from Rs.110 to Rs.60. EPS had halved to Rs.7.50 though positive.

Scenario 4: Assets were written down:


Scenario 4
Numbers in Crores                     (1 Crore = 10 million)
Assets Written Down
Share Capital
500
Bonus Shares
0
New Shares Issued
0
Reserves
4000
Total Net Worth & Liabilities
4500
Face Value of Share

Number of Equity Shares
50
Book Value per Share
90


Net Profit for the year
750
EPS
15.00


Fixed Assets
4500
Cash in Hand
0
Total Assets
4500

In this situation the company had written down the fixed assets by Rs,1000 crores by utilising the reserves. Both the net worth and fixed assets had diminished by Rs.1000 crores each. The book value diminished to Rs.90 from Rs.110.
In this example I had shown that accumulated reserves had been utilized for the write down of assets. Normally the asset write down is shown as an extraordinary item in the profit and loss account against the current year profits. In such a case the EPS would have become negative at -Rs.5 {(loss of Rs.250 crores [Rs.750–1000 crores])/ 50 crore shares}.
In fact I could imagine many more scenarios whereby the book value can fall even when the EPS is positive.
Thank you,
With Best Regards
Anand