Investors look at a lot of metrics and measures when valuing a company. Not only is it important to help inform your understanding of the company and its prospects, but it can also help you identify potential opportunities, as well as companies that may be overvalued and should be avoided.
But knowing a company's market value is only part of the equation, as that only describes what the company is worth to investors today. It's also important to understand the company's net worth, or the net value of all of its assets after liabilities like debt have been paid. Here's a closer look at some metrics, what they mean, and how you calculate a company's net worth
Common "market value" metrics
Metrics such as market capitalization,and enterprise value are handy ways to know what a company is "worth" to investors today. While market cap is simply the value of a company's stock, enterprise value is more of a "total value" measure: It takes the market capitalization, subtracts cash, and then adds in total debt. Enterprise value is sort of a "price to buy" the whole company, since you would get the cash it has with the rest of the assets, but you'd also have to take on its debt.
How to calculate a company's net worth
Understanding a company's market value is one thing, but in isolation, it may not tell the whole story in terms of a company's value. This can be especially true for industries that require major investments in equipment, property, and other high-cost or high-value assets. With this in mind, it's very important to understand how to calculate the net value of those assets. It's actually pretty straightforward how to calculate a company's net worth:
Total assets minus total liabilities = net worth.
This is also known as "shareholders' equity" and is the same formula one would use to calculate one's own net worth. This simple formula essentially calculates what would be left over and divided among all shareholders, if a company were to be liquidated and sold off at the carrying value of all of its assets after liabilities were paid.
This differs slightly from "tangible book value," which subtracts the value of intangible assets such as goodwill. You can find the financial information to calculate these measures in a company's annual 10-K and quarterly 10-Q SEC filings.
Foolish bottom line
Calculating a company's net worth, or any of the other various market value and asset value measures, is only a starting point to valuing a company. It's also worth mentioning that since industries can vary greatly, comparing the per-share asset value of a high-tech, asset-light company to a steelmaker isn't a good idea. Better to use these metrics in comparing companies in the same or very similar industries, and always with a grain of salt and an eye on the company's business prospects as well.
In summary, using net worth or book value as a way to determine if the company's market value is trading at a fair premium or even occasionally a discount can be a useful way to identify great value opportunities, as well as help you avoid stocks that may be selling for more than they are worth. Just don't forget to consider the company's long-term opportunities as a business, as well as the liquidation value of its assets.
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