|
Value is the monetary, material, or assessed worth of an asset, good,
or service. "Value" is attached to a myriad of concepts including
shareholder value, the value of a firm, fair value, and market value. Some of
the terms are well-known business jargon, and some are formal terms for
accounting and auditing standards of reporting to the Securities and Exchange
Commission (SEC).
Understanding Value:
Value can mean a quantity or number, but in finance, it's often used to
determine the worth of an asset, a company and its financial performance.
Investors, stock analysts, and company executives estimate and forecast the
value of a company based on numerous financial metrics. Companies can be valued
based on how much profit they generate on a per-share basis, meaning the profit
divided by how many equity shares are outstanding. The process of calculating
and assigning a value to a company or an asset is a process called valuation.
However, the term valuation is also used to assign a fair value for a company's
stock price. Equity analysts that work for investment banks often calculate a
valuation for a company to determine whether its fairly-valued, undervalued, or
overvalued based on the financial performance as it relates to the current
stock price.
Comparing the different values and valuations of a company to other companies
within the same industry can help with determining investment opportunities.
For example, if the value of a firm is estimated at $50 per share, but the
stock is trading at $35 per share in the market, an investor might consider
buying the stock. On the other hand, if the stock is trading at $85 per share,
far above the perceived value, the investor could consider selling or shorting
the stock. Below are some common uses for the term value in finance and in the
stock market.
Market Value:
A company's market value represents the value according to market participants
in the stock market. For valuing stocks, market value is typically synonymous
with the term market capitalization. Market cap is merely the profit or net
income of a company divided by the total number of outstanding shares of stock.
Book Value:
Book value is the value of a company according to its financial statements or
accounting "books." Book value represents the total amount of money
remaining if the company liquidated or sold all of its assets and paid off all
of its financial obligations, such as debts or liabilities.
Value Stock:
A value stock is a company's stock that trades at a lower price when
considering its financial performance and fundamentals, which could include
earnings or profit performance, dividends, which are cash payments to
shareholders, and revenue generated from sales. Typically, investors searching
for well-run companies that trade at a discount are called value investors.
Enterprise Value:
Enterprise value is the total value of a company, which includes a company's
cash on its balance sheet, short-term and long-term debt as the market
capitalization of the company. The enterprise value of a company shows how well
the management team its capital, which is financed by debt and issuing equity
shares. In calculating the valuation of a company and its stock price,
investors often analyze financial data, but the interpretation of that data can
vary greatly between investors, making valuation analysis both an art and a
science.
Other Uses of Value:
There are many other uses for the term value that goes beyond the stock market.
Real estate and homes have a value associated with them. Within a situation,
something or someone could add value or be value-added. Value-added describes
the enhancement to a product or service by a company, such as an extra feature
or benefit. The goal is to increase the value of the product or service being
offered. The term value proposition is used in the corporate world to represent
a company's promise to its customers that they'll deliver the product or
service as a result of doing business with them.
Net asset value:
(NAV) represents the net value of a company or investment, which is calculated
by subtracting the total amount of assets by the total amount of liabilities.
Net asset value is typically used with investment funds containing a basket of
securities, such as mutual funds. Valuation of a Company The term value can
also be applied to the value of a company versus the valuation of a company.
Although value and valuation are often used interchangeably, the value of a
firm is a number, while valuation is expressed as a multiple to earnings,
earnings before interest and taxes (EBIT), or cash flow. Earnings represents
the profit or net income generated by a company. Cash flow represents the
inflows (credits) or outflows (debits) to the cash position of a company during
an accounting period.
Discounted Cash Flows:
There are various methods that investors use to value a company, depending on
what they believe is more important. Some investors use the cash a company
generates by applying discounted cash flow (DCF) analysis. The DCF method
attempts to forecast or estimate the future cash flows of a company. If a
company can generate cash, they can meet their debt obligations, invest in the
company, or pay dividends. In other words, DCF analysis attempts to determine
investment's value today, based on projections of the cash generated in the
future.
Earnings per Share Valuations:
When investors calculate the valuation of a company and its stock price,
they're essentially comparing how much earnings is generated as a result of
another financial metric within the company. For example, one might want to how
much earnings is generated as a result of outstanding shares of stock, which is
called earnings per share (EPS). Remember, stock and debt issuance are used by
companies to raise funds to invest in the business. Investors want to know how
effectively the management team is using those funds to generate earnings.
"What's the valuation of the firm?" is not the same question as
"What is the value of the firm?" The market valuation would be a
multiple of the current trading price to earnings per share (EPS), such as the
stock price to book value per share, or another price multiple. Using price
multiples allows for valuation comparisons across peer groups. An investor
cannot make sense that the value of firm A is $4 billion, and firm B is $9
billion. To make a more informed investment decision, the investor is better
off knowing that the valuation of firm A is 15x EPS, and firm B is 18x EPS.
|
|
