What it means
Market value is different from book value, which is what the accounts say an asset is worth after original cost and accumulated depreciation. A warehouse bought for $2,000,000 twenty years ago might sit in the books at $600,000 and sell for $5,000,000, and all three numbers are correct for their own purpose.
Confusing them is one of the most common misreadings of a balance sheet. For listed shares the calculation is mechanical, but the interpretation needs care.
Market capitalisation reflects only the equity, so comparing companies with very different debt levels requires enterprise value, which adds net debt to the market capitalisation. A share price on its own tells you nothing about size until you know how many shares exist.
For private assets, market value is an informed opinion supported by evidence rather than a fact. Valuers rely on recent comparable sales, capitalised income or a discounted cash flow, and reasonable professionals routinely arrive at different answers.
That is precisely why shareholder agreements specify who appoints the valuer and how disagreements are settled. Market value drives a long list of real decisions: insurance cover, lending limits, share-based payment charges, the price paid in an acquisition and the amount a departing shareholder receives.
Using a stale figure in any of those places creates a problem that surfaces later, usually at the least convenient moment. The one thing market value can never be is stable.
It moves with sentiment, interest rates and the mood of a small number of marginal buyers, which is a large part of why accounting standards restrict when it may be used directly in the balance sheet.
In practice
Real-world examples.
Example
A family business is valued at $6,400,000 for an inheritance calculation using an earnings multiple, while its balance sheet shows net assets of $2,100,000. The difference is goodwill and customer relationships that the accounts never recorded because they were built rather than bought.
Example
A property company revalues its portfolio and finds market value has fallen 12% after interest rates rose, breaching a loan-to-value covenant even though every tenant is still paying rent on time. The lender requires either a cash injection or a repayment to restore the ratio.
Example
An employee holding options in a private company is offered a buyout at $18 per share based on the last funding round. An independent valuer applies a discount for the lack of a market in the shares and arrives at $13.50, which becomes the basis for the settlement.
Think of it
“Market value is what something would sell for-the price buyers will pay.
Formula
Calculation
Market value of a listed company (market capitalisation) = Share price x Number of shares outstanding. Enterprise value = Market capitalisation + Total debt - Cash.
A listed engineering company has 24,000,000 shares in issue and its shares trade at $42.50. Its market capitalisation is 24,000,000 x $42.50 = $1,020,000,000, so the equity market value is just over $1 billion.
The same company has borrowings of $180,000,000 and cash of $45,000,000, giving net debt of $135,000,000. Enterprise value is therefore $1,020,000,000 + $135,000,000 = $1,155,000,000. A rival with an identical market capitalisation but no debt and $50,000,000 of cash would have an enterprise value of $970,000,000, which is a materially cheaper business despite the identical headline figure.Case study
Seen in the real world.
Fenwick Cold Storage is a fictional logistics business used purely as an illustrative example. It insured its three depots for $9,000,000, a figure set when the buildings were constructed and never revisited in the eleven years since.
After a fire destroyed one depot, the loss adjuster assessed the rebuild cost of that site alone at $6,200,000, while the total market value of all three depots had risen to roughly $18,000,000. Because the policy was written with an average clause, cover of $9,000,000 against a value of $18,000,000 meant the settlement was cut to half the rebuild cost, so the fictional company had to fund $3,100,000 of the work itself.
The illustrative lesson is that market value is not a number you set once. Fenwick's board introduced a three-yearly independent valuation for insurance and lending purposes, with an index-based adjustment in the intervening years, which cost a few thousand dollars annually against a shortfall that ran into millions.
Watch out
Common mistakes.
- Reading the balance sheet as a statement of what a business is worth, when most assets are carried at cost less depreciation rather than at market value.
- Comparing two companies by share price rather than market capitalisation, which ignores the number of shares each has in issue.
- Treating the price from the last funding round as the current market value of a private company, when conditions and the company itself may have changed considerably.
Questions
People also ask.
What is the difference between market value and fair value?
Market value is what an asset would sell for in an actual transaction today, while fair value is an accounting concept that may use models and assumptions when no active market exists.
Why is enterprise value often more useful than market capitalisation?
Because it includes debt and cash, so it measures the value of the whole business rather than just the shareholders' slice of it.
How is the market value of a private company established?
Usually through a valuation using comparable company multiples, comparable transactions or discounted cash flow, often with a discount applied because the shares cannot easily be sold.
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