Market value is a phrase that gets thrown around quite a lot. We hear it in reference to houses, cars, sports stars and more. But we’re not here to talk about those subjects today. We’re here to examine what market value means to investors.
Essentially, the phrase does what it says on the tin. It represents the total value of an asset or company. However, it’s also a subjective measure and it can therefore be challenging to have confidence in conclusions of market value.
But how do you work out market value and how do investors use market value in order to make decisions with their money?
How do you calculate market value?
In many cases, people use the term market value interchangeably with market capitalization. If you’re using this definition, you can calculate it by multiplying outstanding shares by share price.
So, if a company has 100,000 shares in circulation and these are trading at a price of $50 each, the market value of the outfit would be $5m. Simple.
But this doesn’t really do market value justice.
That’s because some investors actually draw a distinction between market value and market capitalization. In this case, the calculation is much more varied and complex. Determining a company’s market value can be a different process depending on factors such as the sector it belongs to or the current state of the market.
As such, there is no set way in which to calculate market value. Instead, let’s take a look at some examples of different things you need to take into account when exploring market value.
How does market value work?
Now we know how to actually work out market value, we can examine what to do with the figure. Basically, investors can use the market value figure to determine whether a company is under- or over-valued.
They do this by coming up with an overall value for a company and compare this with metrics such as book value and shareholders’ equity.
Here are some of the calculations you might want to take into account when working market value out:
Earnings per share (EPS): This is a company's profit is divided by its number of common outstanding shares. Here, a high number is more likely to indicate a healthy company.
Price-to-earnings (P/E) ratio: A company’s current share price relative to its per-share earnings. A high number is more of a negative here.
Book value per share: This is available equity divided by outstanding shares. Look for high values here to find undervalued gems.
After working out these calculations, you’ll want to compare the resultant figures with a company’s industry peers in order to get an idea of how the business is doing.
But even these don’t necessarily tell the whole story.
Market value beyond the maths
That’s because market value is more than just calculations. There’s much more to take in besides the mathematics, such as economic trends, supply and demand, news stories and public perception.
For example, excitement about ESG initiatives, an innovative product or a charismatic CEO can attract investors, pumping a company’s share price to heights that might be beyond the value indicated by its financial information.
On the other hand, bad news such as involvement in a humanitarian or environmental disaster can have the opposite effect, with investors feeling pressure to offload their stock and buyers being put off by a company’s tainted reputation.
These make drawing any conclusion difficult, but can be essential factors to keep in mind if you’re trying to make a savvy investment.
Things are slightly different if you’re looking to calculate the market value of a private company. This is because the company’s financial information is not likely to be readily available.
As such, you are most likely going to have to work with comparisons to publicly traded peers. In this scenario, it’s obviously important to find companies which are comparable. Look for a business which is in the same industry, is of a similar size and has grown at a similar rate.
Advantages and disadvantages of market value
Because there is no set series of formula or considerations that comprise the evaluation of market value, it’s difficult to draw conclusions on its pros and cons as a metric.
In itself, this seems to be a disadvantage. The measure is so subjective, that an investor might simply take the wrong things into account when evaluating a company.
Market value’s heavy reliance on diverse factors means it is also a very dynamic measure, which can change rapidly alongside general economic conditions. This means a reading might not remain relevant for long.
However, when it comes to giving a complete overview of a company’s worth, there are few measures that can take into account the same factors as market value and thus be quite so comprehensive in their analysis.