3 Ways To Know How Much A Stock or Company Is Worth | Exploring Markets

3 Ways To Know How Much A Stock or Company Is Worth

The share price of a company is actually one of the least valuable things you want to know. Instead, at any given moment, you want to know how much a company is worth. Meaning if someone were to buy that entire company for a set price, how much would they pay? There are 3 ways to figure this out.

1. Market Cap: This shows how much a company is worth at any given moment. Market cap is calculated by multiplying a company's total shares outstanding by its stock price. That one calculation tells you what the entire stock market thinks a company is worth in real-time. You can find market cap on any major finance or stock website. The next time you look at a stock, try to ignore its price. Instead look at its market cap as that's the number showing you how much the company is worth if someone were to buy it out. For example, Apple's market cap at the time of this writing is $588 billion.

2. Enterprise Value: Financial pros prefer to use this metric. But it is also harder to find and more complicated to calculate than market cap. The calculation for enterprise value is fairly complicated for new investors:

Market capitalization + debt + preferred share capital + minority interest - cash and cash equivalents

What this formula factors in that market cap does not is debt, preferred shares, and minority interest. Why does enterprise value do this? Because if a company gets bought out right now, a buyer will have to own a company's debt and its minority interest. So in this sense, enterprise value is a deeper look at the liquidity of the company and its balance sheet.

Market cap is a very simple calculation to figuring out how much a company is worth. It's the quickest see a company's total worth at any given time. But it does not tell the complete picture like enterprise value. This is why most pros prefer to use enterprise value as it adds an additional layer that market cap does not.

3. Book Value: This is Warren Buffett's favorite metric and he has made his entire career off it. In-fact, Buffett buys back his own stock at any moment its price falls below a certain percentage of book value. So what is book value? The name comes from its literal meaning: how much is a company worth if you were to open the books and sell everything. The exact calculation is:

Total assets - intangible assets (like patents and goodwill) - liabilities

This calculation tells you how much a company has in assets and how much all of those assets are worth. Book value has its flaws because it does take account for revenue or profit. It is only looking at net assets and things that can be sold right now for a price. But that is also a strength of book value. There is no fancy accounting or financial modeling going on. It is a straight look at the value of a company based on what it owns.

In this post you learned about 3 ways to find the total worth of a company. Each has its strengths and weaknesses in terms of showing the whole picture. Market cap is the quickest and easiest way to gauge what the market thinks about a company. Enterprise value is a deeper look into a company's total worth and includes things like debt in its calculation. Then lastly there is book value. This is a simple gauge of what a company owns and how much all of that can be sold for.