The concept of value for common stock differs depending on the user. Current investors or a stock's potential buyers may want to know the current value of common stock based on its future earning potential. Investors and analysts arrive at this value through a few different methods, such as calculating the present value of the stock's future cash flow from dividends. Accountants consider common stock from an accounting value perspective and calculate the stock's value on a book basis.
1. Locate the company's balance sheet. When a company authorizes shares of common stock for sale, an accountant records them at a specific value on the balance sheet. An accountant records the common stock in the stockholders' equity section of the balance sheet.
2. Locate the firm's total equity figure on the balance sheet. This number shows in the stockholders' equity section at the bottom of the balance sheet. The total equity is the sum of the total amount of stock issued plus cumulative retained earnings of the firm. For this example, assume the firm has only issued common stock, with no preferred stockholders.
3. Locate the number of common shares the firm has outstanding. This number shows in the text of the common stock account title in the stockholders' equity section. For example, the title on the balance sheet would say something like: "Common stock, $0.01 par, 20,000 shares authorized, 1,000 shares issued and outstanding."
4. Divide the company's total equity, or net worth, by the number of common shares outstanding. For example, assume total stockholders' equity is $50,000. Divide $50,000 by the 1,000 shares of common stock outstanding. The result — book value of the common stock — is $50 per share.
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