What is Market Value? Formula and Calculation

What is market value?

A market value in accounting refers to the price an asset can fetch in the marketplace. It can imply the investment given to specific equity or a business. Another name for a market value is open market valuation (OMV). Oftentimes, a market value is used to refer to the market capitalization of a company publicly traded, and the calculation takes place by multiplying the number of outstanding shares by the current share price.

The market value becomes greater when the valuations are higher. Market values are dynamic in nature because of the fact that they are dependent upon an assortment of factors, ranging from physical operating conditions to economic climate to the dynamics or forces of demand and supply.

The market value can fluctuate over periods of time and the business cycle is an influential factor. It plunges during the bare markets that accompany recessions and rise during the bull markets that take place during expansions in the economy. Also, the market value depends on many other factors such as the sector under which the company operates, its profitability, debt load, and the broad market environment.

It is important to note that market value is not the same as the market price of a property. Market price can either be more or less than the market value. This is so because the market price is the price at which the seller agrees to sell the property. Also, the market value can be the same as the market price, though the seller may accept to sell his property at a lower price for some reasons such as the need for a quick sale.

The market value of stocks

To determine exchange-traded instruments such as fixed income securities such as stocks and future, market value is the easiest means. This is because their market prices are widely disseminated and easily available. However, this is a little more challenging to determine or ascertain for over-the-counter instruments like fixed-income securities. The most challenging thing about determining market value lies in estimating the values of those assets that are not liquid. These illiquid assets include businesses and real estate. This may call for the need to make use of the real estate appraisers and business valuation experts respectively.

A firm’s market value may diverge significantly from book value or the equity of shareholders. We can consider a stock undervalued if its market value is far below book value. This implies that the stock is trading at a deep discount to book per share. This does not necessarily mean that the stock is overvalued if its trading is at a premium to book value. It is therefore dependent on the sector and the extent to which the premium is in relation to the stock’s peers.

The book value also refers to the explicit value which has a great influence on the implicit value of a company (that is the personal perceptions and research of investors and analysts). In turn, this affects the rise or fall of a company’s stock prices.

The market value of equity

The market value of equity is the total currency value of the equity of a company and this can also refer to the market capitalization. It can also refer to a company’s total value which the investors decide. In the course of the trading day, the market value of equity can shift significantly. Equity seems to have a more stable market value in large companies owing to the number and diversity of investors that are available. On the other hand, for small companies, there is usually a double-digit shift in the market value of equity due to the relatively small amount of transactions that pursue the stock up and down. This also forms part of the reasons why small companies can be targets for market manipulation.

The term, therefore, is a representation of what or how much investors think a company is worth today. The changes in the market value of equity are proportionate to the changes or fluctuations in the stock price. This, therefore, enables investors to diversify their investments across companies of various sizes as well as their different risk levels. Investors look towards calculating this variable for them to be able to find the total number of shares outstanding. They do this by looking at the equity section of the company’s balance sheet.

It is calculated by multiplying the number of outstanding shares by the current price per share. For example, on July 4th, 1995, Tecno stock was trading at $188.72 per share. As of this date, the stock buy-back program of the company has lowered the shares outstanding from over 6 billion to 4,715,280,000. Therefore, the calculation will be as follows;

Stock Price ($188.72) x Shares Outstanding (4,715,280,000) = $889,867,641,600 ($889.9 billion).

Market value calculation

There are different methods of calculating the market value under the income approach and the market approach.

A) Income approach

Discounted cash flow (DCF)

Under the discounted cash flow approach, the market value is a function of an estimate of the present value of future cash streams of a company. This takes place by projecting future cash flow which the company then discounts to reach its present value. The discounting rate is dependent upon the prevailing interest rates and the degree of risk that has to do with the business to be valued.

Capitalized earnings method

Companies use the capitalized earnings method to calculate the worth of a property that produces stable income. They divide the net operating income accrued over a certain period of time by the capitalization rate. The capitalization rate is an estimate of the potential return on investment (ROI).

Assets Approach

Under this approach, the company calculates the FMV by computing the adjusted assets and liabilities that the company holds. This approach accounts for intangible assets, off-balance sheets assets, and liabilities that have not been recorded. Here, the difference between the assets’ FMV and the liabilities is the value of the net adjusted assets.

B) Market approach

Public company comparable

We can evaluate the value of a business by comparing all the businesses that operate with the same scale in the same industry or region. After making an establishment of a peer group of comparable companies, then we can calculate ratios such as  EV/EBITDA, EV/Revenue, P/E ratio.

Precedent transactions

Under the transactions method of valuation, we use the price paid for similar companies in earlier transactions as a reference. This is a method commonly used before a prospective merger and acquisition deal. Therefore, it is of utmost importance to identify a transaction within the same industry, firms with a similar scale of operations, and the involvement of the same type of buyer.

Market value ratios and formula

The expression of market value takes the form of mathematical ratios giving the management insight into the thought of the company’s investors about the organization, both in the present and in the future. The market value ratios refer to the financial metrics that firms and investors use to evaluate the worth of stocks of publicly traded companies. Firms and investors use the market value ratio to decide whether the valuation of shares is undervalued, overvalued, or in correspondence to the market, therefore, these ratios are important. In other words, investors use these ratios to check whether the prevalent market share prices are in synchrony with the performance of the company. In stock companies, investors use these ratios to make investment decisions.

The overvaluation or undervaluation of shares enables investors to make decisions with regard to going long or short on the shares they will invest in. If there is a case of share overpricing, the price will surely fall in the future thereby making the investor short the shares for a while. On the other hand, a case of underpricing will cause the investor to go long for it.

Therefore, the market value ratio gives investors insight into the price of the shares and the company’s financial and managerial efficiency. A company will be able to analyze its future prospect as well as the different trends of the stock market using the ratios

Different market value ratios exist, which share market investors make use of. The most frequently used ratio include;

  • Price to earnings or PE ratio
  • Earnings per Share
  • Cash earnings per share (CEPS)
  • Book value per share
  • Dividend yield
  • Market to book ratio
  • Price-to-book ratio

Price to earnings or PE ratio

Investors use the price-to-earnings ratio to check whether shares are overpriced or underpriced compared to their earnings potential. They measure this metric as the current price of the share against the reported earnings of the company for the financial period on the basis of per share. The price-earnings ratio is expressed as the current price of the stock divided by the earnings per share.

The formula is as follows;

PE ratio = Price per share/earnings per share (EPS)

Earnings per share (EPS)

The earnings per share show the earnings of a company in the period under analysis with respect to the number of company’s shares that are outstanding during that same period. This ratio helps one to understand investment is worth the money or not. Analysts calculate earnings per share by allocating a portion of the company’s profit to every individual share stock. In essence, higher earnings per share imply that the profitability is higher.

The formula is;

EPS = Net Profit (Earnings) / total number of shares outstanding in the market

Cash earnings per share (CEPS)

It is well known that cash is vital for the operations of a business, its sustenance, and growth. CEPS gives a glimpse of the actual cash that a company earns. It is important in cases of start-ups and capital-intensive industries. It is also important where the expansion or diversification plan is underway or has just been completed and full capacity utilization is bound to take some time.

The CEPS formula is;

CEPS = Net Profit + Non-cash items / outstanding shares in the market.

Book value per share

The book value per share ratio shows the relationship that exists between a company’s book value (total equity minus the shareholders’ preference shares) and the outstanding shares in the market. In terms of fundamental analysis, book value is the intrinsic value. To derive the book value per share, divide the company’s equity by the total number of outstanding shares.

The formula is ;

Book value per share = (Shareholder’s Equity – Preference stock) / Outstanding numbers of shares.

Market value per share

A company derives its market value per share by dividing the total market value by the total number of outstanding shares. This will give analysts the price per share in the market. We can express this ratio in other words as a company’s market capitalization in the secondary market divided by the total number of the company’s outstanding shares. The market value therefore can suggest the company’s total market capitalization and vice-versa.

Market Value per Share = Market capitalization / Outstanding shares in the market.

Dividend yield

The dividend yield is a ratio that helps in measuring the number of dividends distributed in a year against the number of outstanding shares. This is because investors both the price of a share and the dividends they earn from it. With this, investors can have an insight into the company’s earnings and they can decide whether they want to invest in the shares which will pay a certain amount of dividend against the current share price in the market.

Dividend yield = Total dividend paid annually / Number of outstanding shares.

Market to book ratio

The market to book ratio shows the relationship between the market value of a share and its book value. This makes it easy to figure out the existing differences between the two metrics. This helps to determine whether the prices are undervalued or overvalued as per the equity that is standing in the books. In other words, companies use the market/book ratio to compare their market value o its book value. To calculate it, they divide the market value per share by the book value per share thus;

Market to Book Ratio = Market value per share / Book value per share.

Book value

The book value of an asset refers to the net difference between the total assets of a company and its total liabilities where it represents the total value of a company’s assets that shareholders would receive at the liquidation of the company. It equals the cost of carrying an asset on a company’s balance sheet. When firms calculate it, they net the asset against its accumulated depreciation. Because of this, we see the book value as the company’s net asset value. Firms and investors calculate the book value as a company’s total assets minus intangible assets such as patents and goodwill and liabilities. The book value may be net or gross expenses which include costs of trading, sales taxes, service charges, etc., for the initial outlay for an investment.

Firms calculate their book value per share by dividing the total number of a company’s common stockholders’ equity less the preferred stock, by the number of the company’s common shares. We can also refer to book value as the net book value or net asset value of a firm.

The market price of a stock

The market price of stock refers to the price at which a stock is sellable on the open market at a specific period of time. This is bound to fluctuate in the course of the trading day as investors engage in the buying and selling of stocks. If more people are willing to buy, the market price will rise and it falls when people begin to sell more of the stock. It is important to note that the market price is not necessarily an indicator of the value of stocks.

With respect to the trading of securities, the market price is the most recent price at which the trade of securities takes place. This market price results from the interaction of traders, investors, and dealers in the stock market. For a trade to take place, there has to be a buyer and a seller that meet at the same price. while buyers represent bids, sellers represent offers. The bid refers to the higher price an individual is advertising they will buy at while the offer is the lowest price an individual is advertising they will sell at.

Book value vs. market value

It is more difficult to determine a company’s book value than to find its market value but yet, far more rewarding. The market value is dependent on that the people are willing to pay for the stock of a company. The book value on the other hand is similar to the net asset value of a firm, which jumps around much less than the stock prices. Firms have a more stable path to achieving their financial goals when they learn how to use the book value formula.

Frequently asked questions

What is market value with example?

A market value refers to the price an asset can fetch in the marketplace. It can imply the investment given to specific equity or a business. Another name for a market value is open market valuation (OMV). For example, on July 4th, 1995, Tecno stock was trading at $188.72 per share. As of this date, the stock buy-back program of the company has lowered the shares outstanding from over 6 billion to 4,715,280,000. Therefore, the calculation will be as follows;

Stock Price ($188.72) x Shares Outstanding (4,715,280,000) = $889,867,641,600 ($889.9 billion).

What is the market value of a product and why is it important?

The market value of a product is the price that the product can fetch in the marketplace. It can also mean the investment given to specific equity or a business. It is important because it helps in identifying the right target market. Also, it provides a concrete method of eliminating ambiguity or uncertainty while determining the worth of an asset. The market value is a good factor that indicates the perception investors have about business prospects.

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