How to Calculate the Market Value of a Company

How to Calculate the Market Value of a Company

If you’re considering investing in a company, or want to sell your own, knowing how to value a company can help you avoid losing money. A company’s market value represents investors’ expectations for the company’s future earnings. Valuing an entire business can be more difficult than in smaller, more liquid assets such as stocks. But don’t worry, there are many ways to calculate a market value that accurately represents a company’s true value. The various methods discussed in this article are relatively simple, and will refer to the company’s market capitalization (stock value and issued shares), analyze similar companies, or use industry valuation multiples to determine its market value.

Method 1

Calculate market value using market capitalization

Determine if the market cap is the best valuation option. The most reliable and straightforward way to determine a company’s market value is to calculate what’s called “market capitalization.” Market capitalization represents the total value of all outstanding shares. Market capitalization is equal to the value of a company’s stock multiplied by the total number of shares issued. It is used to measure the overall size of a company. 

  • Note that this method is only applicable to public companies, whose stock values ​​are well established.
  • The disadvantage of this method is that the company value it calculates is subject to market volatility. If the stock market falls due to external factors, the market capitalization will fall even if the company’s financial health has not changed.
  • Because market capitalization depends on investor confidence, it can sometimes be erratic and unreliable in measuring a company’s true value. Many factors can affect the price of a stock and, in turn, the market value of a company. Therefore, it is best to use this value with a grain of salt. Even so, many potential buyers of the company will have similar expectations and value the company’s potential earnings accordingly.

Determine the company’s current share price. Many websites, including Sina Finance, NetEase Finance, and Oriental Fortune.com, publish the stock prices of listed companies. You can also search for stock price information by typing the company name + “stock” or ticker symbol (if you know it) into a search engine. When calculating the market value of a company, the stock value used should be the current market value, which is usually displayed in a prominent position on the securities report pages of major financial websites.

Find out the number of shares issued. You have to know how many shares the company has issued, i.e. how many shares of the company are held by all the company’s stockholders. Shareholders include both insiders such as employees and board members, as well as outside investors such as banks and individuals. The website that publishes the share price also publishes the number of shares, and you can also find this information on the company’s balance sheet under the “Equity” column.

  • By law, the balance sheets of all public companies are freely available online. With a little search on a search engine, you can find the balance sheet of any listed company.

The market value is determined by multiplying the number of shares outstanding by the current share price. This figure represents the total value of the company’s shares held by all investors and more accurately reflects the overall value of the company.

  • For example, suppose there is a public telecommunications company called Huitong that issues 100,000 shares. If the current trading price per share is 13 yuan, the company’s market value is equal to 100,000 times 13 yuan, or 1.3 million yuan.

Method 2

Use similar companies to determine the market value

Determine if this is an appropriate valuation method. This method is another effective valuation method if the company is privately held, or if the market capitalization is not considered realistic for any reason. To assess the value of this company, you can look at the selling prices of similar businesses.

  • If a company’s value is mainly reflected in intangible assets, and investors’ overconfidence or speculation pushes the price up beyond a reasonable limit, the market value does not match reality.
  • This method has several disadvantages. First, it is difficult to find enough data, as transfer sales of similar companies can be very rare. Furthermore, this estimation method cannot account for material differences between the sale of a business transfer, such as whether the company was forced to sell.
  • However, if you want to know the market value of a private company, there are not many methods available, and comparative valuation is an easy way to get a rough estimate.

Find similar companies. Several aspects need to be carefully considered when choosing which companies are comparable. Ideally, the companies being compared and the companies being valued should be in the same industry, roughly the same size, and have similar sales and profits. In addition, the sale transfer of the comparison company should have occurred shortly to roughly reflect the latest market conditions.

  • If you want to determine the market value of a private company, you can use public companies of the same industry and size. It’s easier because you can find their market value in minutes using the market cap method by searching online.

Find the average selling price. After finding out the recent sale prices of similar companies or the valuations of similar listed companies, add up all sale prices to obtain an average value. This average can be used as a starting value for an estimate of the company’s market value.

  • For example, suppose 3 mid-sized telecommunications companies have recently sold for 900,000 yuan, 1.1 million yuan, and 750,000 yuan. The average of the three sale prices was $916,000. This result seems to indicate that Huida’s market value of 1.3 million yuan is a bit too optimistic as a valuation.
  • You may wish to assign different weights to each company based on how similar it is to the target company. For example, if there is a company that is very similar in size and structure to the company to be valued, you can give the company’s sale price a higher weight when calculating the average sale price. Refer to How to Calculate Weighted Average for more information.

Method 3

Use multiples to determine the market value

Determine if this is the correct approach. When valuing a small business, the multiples method is the most appropriate. This method uses revenue statistics such as total sales, total sales, and inventory, or net profit, multiplied by appropriate coefficients, and arrives at the valuation of the business. This estimate is a very rough preliminary valuation method because it ignores many important factors that determine the actual value of a company.

Find out the necessary financial statistics. Typically, using multiples to value a company requires annual sales or revenue. Valuing is also helpful in knowing the company’s total asset value and profit margin, the former also including the value of all its existing inventory and other holdings. These values ​​can be obtained from the financial statements of public companies. However, to obtain this type of information from a private company, you must obtain approval.

  • A company’s income statement reports sales or revenue, as well as commission and inventory expenses if any.

Find suitable coefficients. The coefficients used will vary depending on the industry, market conditions, and specific circumstances within the business. This number is somewhat subjective, but a trade association or enterprise valuer can better determine this number for you. BizStat’s valuation “rule of thumb” is a good example. 

  • The source of the coefficient also determines the financial statistics that should be used in the calculation. For example, total annual revenue (net income) is often used as the initial statistic.

Calculate the value using coefficients. Once you’ve found the financial statistics you need, and determined the appropriate coefficients, you can get a rough valuation of the company simply by multiplying the two together. Again, this is a very rough estimate of market value.

  • For example, assuming that the market value is approximately equal to 1.5 times the annual revenue when using the multiple methods to value a medium-sized accounting firm, and Huida’s total revenue this year is 1.4 million yuan, the enterprise valuation obtained by the multiple methods is equal to 1.5 Multiply by 1.4 million, or 2.1 million.
By aamritri

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