The term market value refers to a company’s or an asset’s worth in the financial market. A company’s market value is the price that investors are ready to pay for its shares. In simpler terms, the market value of a company is influenced by how investors view its potential. The greater a company’s estimated worth, the greater is its market value. As an investor, you should know that market value fluctuates considerably with time. It depends on numerous factors like growth potential, supply and demand graph of a stock, choice of valuation methods, and whether a stock is reasonably priced or not. The most common and simplest way of calculating a company’s worth is through the P/E ratio. Besides being the most important ratio, it simply tells the price that an investor is ready to pay for profits made per share. P/E ratios are calculated for individual companies as well as industries on a whole. When a company’s P/E ratio is higher than its peers or the industry average, it can indicate that the company is fundamentally stable and performing well.
The most common market value ratios used to evaluate a company’s stock include:
- Earnings per share: Because higher earnings per share indicate a more profitable business, this metric can positively (or negatively) influence how investors view a company’s worth.
- Book value per share: This number is found by dividing a company’s equity by total outstanding shares. Higher book values tend to mean that a stock is undervalued, and can therefore impact how the asset or company is perceived by the market.
- Price-to-earnings ratio (P/E ratio): This ratio is the current price of a stock divided by its earnings per share. A high P/E ratio indicates that a stock’s price is high relative to its earnings and may be overvalued by the market.
If you’re looking for a quick way to calculate market value, you may be thinking of market capitalization, a similar, but wholly different metric used to determine a company’s financial standing. For private companies that don’t publicly disclose financials, it can be harder to assess market value. It’s typically done by comparing a private business’s value to publicly-traded ones in the same industry with similar sizes and growth rates, and calculating relevant ratios to contextualize its performance.