What is the Face Value of Share?
Created on 27 Feb 2021
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While watching the share prices on business news channels, you may have wondered what is the amount shown in the superscript of the name? Well, that tiny number is the face value of the share. It is the same price shown in the prospectus when a company launches an IPO. Let's take a better look to understand everything about face value.
What is Face Value?
Face Value, also known as the par value, is the value of a company mentioned in its books and documents like Memorandum of Association. It is decided by the management of a company and used in financial statements. Mostly, the face value of shares of Indian companies is Rs. 10 per share.
Importance of Face Value
You may think that the face value is not vital. But that is not the case. Face value is considered for the following:
- Calculation of Dividend: Dividends given on shares are announced on the face value, not on the current market price. That is why, when the company announces the dividend of 10%, it means Rs. 1 per share and not 10% of the share price!
- Calculation of market price: In the case of split or consolidation in the shares of a company, the market price reacts accordingly.
- Calculation of premium: We can calculate premium by deducting the face value of a share from its issue price. For example, the issue price of the recent Heranba Industries IPO was around Rs 627 per share with a face value of Rs 10. Thus, we can say that it was issued at Rs 617 premium, which is around 6170% of the face value!!
- Calculation of Ratios: Besides the above, face-value helps in determining the amount of share capital. It helps in calculating several ratios such as Return on Equity, Return on Capital Employed, and other ratios. They help in doing the fundamental analysis of the company.
Can Face Value of a Share Change?
Generally, the face value remains fixed. But there are some instances where the management may change even the face value of a share:
- Stock Split: It refers to the division of shares of a company by its management in a fixed ratio to increase the liquidity. It decreases their face value. E.g., The share with a face value of Rs. 10 can be split in 2:1 to make two shares of Rs. 5. You wouldn't believe that shares of MRF have not been split yet, despite being the costliest in the share market!
- Consolidation (Reverse Stock-Split): As the name suggests, it is the opposite of a stock split. In this, the shares are consolidated proportionately to reduce liquidity which increases their face value. E.g., 5 shares of Rs. 2 can be consolidated to become a share of Rs. 10.
- Reduction of Share Capital: When the company faces continuous losses, it may reduce the face value of its shares to write off its losses.
End Your Confusions
After reading so far, you should understand about the face value of a share. But you may have also heard about market value, book value and intrinsic value of a share.
Lets' understand them all one by one:
Market Value: The market value is the price at which the share is traded on the stock exchange. It keeps on changing based on the demand and supply of the shares. But the face value of a share remains fixed. The market value of the companies exceeds their face value, except in the case of penny stocks. Their market value ranges from Rs. 1 to Rs. 5, while their face value may be Rs. 10. On the other hand, there are stocks like Nestle, whose market value is around Rs. 16400, while the face value is just Rs. 10!!
Book Value: Book value of a share is the per-share net value of a company's assets found on its balance sheet. It is approximately equal to the total amount a shareholder would get for each share they hold if the company is liquidated. It can be calculated by using the following formula:
Book Value = (Total Assets- Total Liabilities- Preference Capital)Outstanding Equity Shares
Intrinsic Value: Intrinsic Value of a share is the current underlying value of the stock. It is based on various assumptions such as the Dividend Discount Model, Discounted Cash Flow Model, P/E Ratio Analysis and many more. But the most popular among them is the Discounted Cash Flow Model. A stock is considered to be undervalued if its intrinsic value exceeds the market value.
Face value is the price of a share as recorded in the books of the company. It is determined by the management and is used to calculate dividends, market price, and premium. It has no relation with the market price of the share, which exceeds the face value in most cases. Generally, it remains fixed. But it can change in case of a stock split, consolidation, or reduction in share capital.
Although face value is important, other aspects like market value, book value, and intrinsic value of a share are more crucial while doing the analysis of a company. So they cannot be ignored. In the end, remember this:
The Face Value of a Company is NOT its True Value.
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