How to Calculate the Market Value of a Company
If you’re thinking of investing in a company, or selling yours, it helps to calculate the value of that company for yourself so that you get your money’s worth. The market value of a company represents investor expectations of a company’s future earnings.
Unfortunately, an entire business cannot be valued as easily as a smaller, more liquid asset like a share of stock; however, there are a multitude of ways to calculate the market value of a company that may accurately represent the true value of a company.
Some of the simpler methods discussed here involve considering the company’s market capitalization (its stock value and shares outstanding), analyzing comparable companies, or using industry-wide multipliers to determine market value.
- Note that this method only works for publicly traded companies, where share values can be easily determined.
- A disadvantage of this method is that it subjects the company’s value to the fluctuations of the market. If the stock market declines due to an external factor, the company’s market capitalization will fall even if its financial health has not changed.
- Market capitalization, because it relies on investor confidence, is a potentially volatile and unreliable measure of a company’s true value. Many factors go into to determining the price of a share of stock, and thus a company’s market capitalization, so it’s best to take this figure with a grain of salt. That said, any potential buyer for a company might have similar expectations to the market and place similar value on the company’s potential earnings.
Determine the company’s current share price. The share price of the company is publicly available on many websites, including Bloomberg, Yahoo! Finance, and Google Finance, among others. Try searching the company’s name followed by “stock” or the stock’s symbol (if you know it) on a search engine to find this information. The stock value that you’ll want to use for this calculation is the current market value, which is usually displayed prominently on the stock report page on any of the major financial websites.
Find the number of shares outstanding. Next, you’ll have to figure out how many shares of the company’s stock are outstanding. This represents how many shares the company are held by all shareholders, including both insiders, like employees and board members, and external investors like banks and individuals. This information can be found either on the same website as the stock price or on the company’s balance sheet under “capital stock.”
- By law, all publicly-held companies’ balance sheets are available online for free. A simple search engine search will turn up any public company’s balance sheet.
Multiply shares outstanding number by the current stock price to determine the market capitalization. This figure represents the total value of all investors’ stakes in the company, giving a fairly accurate picture of the company’s overall value.
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