In the world of investments there are two primary ways in which investors analyze value: book value and market value. Market value is the value of the asset on the market. Therefore market values are driven by the supply and demand for the stock. Book value is the accounting value of the stock and can be found on the income or balance sheet in the annual report. To calculate the book value of bank stock, the analyst must first learn how to read financial sector financial statements.
Download the annual report from the company website or request a copy from its investor relations department.
Turn to the balance sheet and scroll to the line item Shares Outstanding.
Turn to the income statement and scroll to the line item Net Income, which is usually the last line item on the income statement. For banks, net income may also be called Net Interest Income.
Divide the Net Income line by the Number of Shares Outstanding line. This is the actual book value of one share of stock. For instance, if the net interest income is $100 and the number of shares outstanding is 1,000, the book value of one share of stock, also known as earnings per share, is 10 cents.
Analysts can compare the book value of the bank stock to the market value of the bank stock to determine if it is over- or under-valued.
- Analysts can compare the book value of the bank stock to the market value of the bank stock to determine if it is over- or under-valued.
- bank image by Pefkos from Fotolia.com