Knowing the value of your business and product is key to understanding if you’re heading in the right direction. In this article we’ll explain the meaning of market value and why it matters to your brand.
Market value definition
The simplest market value definition is the price an asset or company would have if it were offered on a financial market, i.e., it’s stock market value. It’s sometimes referred to as OMV or ‘open market valuation.’ It can be difficult to calculate market value for different things. For example, stock market value is relatively easy to find, but it’s less easy to confirm the value of something like a business.
An insight into market value can be gained in different ways, including:
Earnings per share (EPS): calculated by giving a portion of profit to every individual share.
Book value per share: divides the company’s equity by the total outstanding shares.
P/E ratio: the price of current stock divided by earnings per share.
What is fair market value?
Fair market value is the term give to the price of an asset if certain conditions are met:
Buyers are knowledgeable about the asset
They act in their own best interest
They are free from any pressure to trade
They have a reasonable amount of time to carry out the transaction
For example, the market value of a house may be one figure, but the fair market value would be another. Depending on the circumstances of the buyer or seller, a house’s market price can easily be more or less than its true value. The valuation of a house in a divorce settlement, therefore, would be based on fair market value and not its listing price.
The difference between fair market value and market value is often what drives traders, taking advantage of stocks when they appear undervalued compared to fair market price. A fair market price of an asset is only the same as its market value when a fair market exists.
How do you find the market value of a business?
There are several ways to calculate market value, including:
Discounted cash flow (DCF): This is when the future value of a cash flow is calculated and then discounted until it reaches its present value. The rate of risk that the business has, as well as prevailing interest rates, should dictate the discounting rate.
Capitalised earnings: The net operating income of a business, as accrued over a certain period of time, is then divided by the estimated return on investment.
Public company comparable: The value of a business is calculated according to the value of other businesses that operate in the same area, sector, and to a similar scale. Using these comparisons, ratios such as the P/E ratio can be applied.
Precedent transactions: Often used before mergers and acquisitions, this method looks at the sales price of other businesses of a similar profile.
What is the market value of equity?
The market value of equity refers to the total value of a business’s equity, which can be found with the following formula:
Current Stock Price x Total Number of Outstanding Shares = Market Value of Equity
This figure shows how much investors think a company is worth, but it can change extremely quickly. It is different to both market value – which is valued by market participants – and book value, which is based on assets within the balance sheet.
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