Before investing in a company, it is essential that you use a total value formula to determine its worth so you can know whether it’s worth purchasing partly or wholly. However, the total value of a company varies, depending on what aspects you are looking at. Therefore, you need to consider the true worth of the business in question from multiple angles to get a 360-degree view of it.
One way to analyze the total company value is by looking at its balance sheets. These will enable you to access the information of companies regardless of whether they are private or publicly traded. That said, you can also look at the market performance of a company.
Below are some of the ways in which you can calculate an organization’s total value equations.
1. Book Value of a Company
A business’ book value is the sum of all its assets minus its liabilities. It represents the company’s equity, or what would remain after it is liquidated.
You can get an idea of a company’s book value by looking at the stockholder’s equity section in the financial statements. Just add up all the line items under that section, like retained earnings and contributed capital, and you will obtain the company’s book value.
Alternatively, you can use the total value formula:
Book Value of A Company = Total Assets – Total Liabilities
Remember that assets include both tangible assets, like vehicles and buildings, and intangible assets, like intellectual property and brand name.
Typically, a business’ book value is an excellent way to determine a company’s fair value because it factors in its assets’ depreciation and debts. And because it relies on historical data, this figure is objective instead of subjective.
If you divide the shareholder’s equity by the total number of common stock outstanding, you will get the book value per share. You can then compare this value to stock value to determine if you are getting a good deal when buying a company’s shares.
2. Liquidation Value of a Company
A company’s liquidation value is what its owners would get if they were to sell it hurriedly in the open market within 12 months. While it may consider depreciation of assets, it does not factor the value of intangible assets and is based on market prices.
The liquidation value of any business will always be lower than its fair market value. Also, if the business were to be sold quickly in an auction, you must account for an even lower price. That’s because you will have even less time to sell a business in distress.
It makes sense to consider the liquidation value of a company if it faces a possible bankruptcy situation or if you are a creditor looking to finance its operations.
If the market price of a business stock is less than the liquidation version, it indicates a lack of confidence among investors concerning the company’s future prospects. And in such a case, it would be best to sell the company and return the net money generated back to investors.
The total value formula in this case is:
Liquidation Value = Total Tangible Asset Value at Time of Liquidation - Total Value of Liabilities
Liquidation Value = Auction Value of Assets - Liabilities
3. Market Value of a Company
The market value or market capitalization of a company refers to its stock value within the open market. It depends on the number of outstanding shares and the share price. You can find the information from a company’s website, stock market websites such as the Wall Street Journal and company balance sheets.
The market value of a company tells you what people are willing to pay to own it. And that value is subjective, based on investors’ perceptions of the business’ potential, instead of the historical data.
In this case, the stock market total value formula is:
Market Value = Current Stock Price * Company’s Outstanding Shares
Calculating the company’s market capitalization can help you know the earnings per share value, which is an indicator of profitability.
4. Enterprise Value of a Company
A company’s enterprise value is the total value of a company if you were to buy it. It considers the business’s market value, debts and preferred stock. And then, it subtracts its cash and cash equivalents from the total value equation.
You should consider the enterprise value of a company if you want to buy or take it over. That’s because you would have to pay everyone with a stake in it, including debtors and shareholders, before owning it.
In this case, the total value formula would be:
Enterprise Value = (Market Value of Company + Total Debts) - (Cash+ Cash Equivalents)
It is important to learn the various value formulas for any company that interests you. That way, you can determine its profitability, whether it’s worth investing in and if you can acquire it. Generally, the knowledge comes in handy whenever you want to determine how healthy a business is.
- Corporate Finance Institute: Book Value
- AccountingTools: How to find the book value of a company
- AccountingTools: Liquidation value definition
- The Business Professor: Liquidation Value (Valuation) - Explained
- ScienceDirect: Liquidation
- Business Insider: How market value can help you determine the true worth of company or asset
- Corporate Finance Institute: What is Market Value?
- NetSuite: What Is Enterprise Value (EV)? Importance & How to Calculate
- GOCardless: What is enterprise value & how do you calculate it?
- Total company value should always be looked at in terms of what a company can do more profitably and what assets a company can best convert to cash.
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