How to estimate equity value?

Equity Value, also known as market capitalization, is the total of the shareholders’ values available for the business and can be calculated by multiplying the market value per share by the total number of shares outstanding. It is very important for a business owner, especially when he plans to sell his business, as it gives a good measure of what a seller of business would receive after the debt has been paid.

Let us look at the above graph of the Equity Market Value of Exxon, Apple, and Amazon. We note that in 2007-08, Exxon was far ahead in market value compared to Amazon and Apple. However, Apple and Amazon’s market value has catapulted over the years, and now they are leading companies. Does it even matter?

There are two ways in which you can calculate Market Value of Equity

Equity Value = Share Price x Number of Oustanding Shares

This second equity market value formula is commonly used to find the “fair equity value” (using DCF Approach)

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We use the following steps to calculate the fair equity market value –

Target Price of the stock = Fair Equity Value / Number of Oustanding Shares

Please note that the Market Price of stock and the Target Price of stock are two different things.

Let us assume that the Market Price of Apple is $110 per share. Using DCF, you may get a target priceTarget PricePrice Target in the context of stock markets, means the expected valuation of a stock in the coming future and the valuation may be done either by the stock analysts or by the investors themselves. For an investor, price target reflects the price at which he will be willing to buy or sell the stock at a particular period of time or mark an exit from their current position.read more of Apple stock as $135 per share. This means that Apple is undervalued and should reach the target of $135 per share shortly.

Equity value is more useful to a business seller than an investor. Let’s have a detailed look at this.

Let’s say that Mr. A has a company he wants to sell. Now he is concerned about the valuation of the company. One day, while searching for buyers for his business, Mr. A got a proposal from Mr. B. Mr. B said he would buy Mr. A’s business at a certain valuation. Mr. A went back home and thought about the valuation Mr. B gave. Mr. A mentioned that he had taken some loans for his business, which have not been fully paid yet. Mr. B said he would pay the same as the valuation he had calculated; however, Mr. A will only receive the money after paying the debt. And that’s “market value of equity” in the true sense.

Now let’s understand it in numbers. Mr. B said he would pay the US $10 million for Mr. A’s business before knowing that Mr. A still has to pay some debt. Mr. A mentioned that the outstanding debt is US $2 million. Then Mr. B agreed to pay Mr. A US $10 million for the business, including the outstanding debt. That means Mr. A would only get US $8 million. Here the US $10 million is the enterprise value, and the US $8 million in the equity market value.

Let us do a basic example of comparing two companies based on market value and finding the larger one. Here are the details of Company A and Company B –

In this case, we have been given both the numbers of outstanding shares and the market price of shares. So let’s calculate the equity market value of Company A and Company B.

We note that the market value is more than the market value of Company B. But let’s tweak a few things and calculate Enterprise Value and let’s see how it turns out for investors.

Please have a look at the table below.

source: ycharts

If you want to calculate the Market Value of Facebook, it is simply the outstanding number of shares (2.872 billion) x Price ($123.18) = $353.73 billion.

In the final analysis, it can be said that equity value is the best method if the owner of a business wants to know how much he would get by selling his business. However, from the investors’ point of view, enterprise value will fit the bill.

This article has guided what equity value is and its definition. Here we discuss examples of a firm’s equity value and its interpretations and how it is useful to sellers. You may also look at the following articles to learn more about valuations –

Basic equity value is simply calculated by multiplying a company's share price by the number of basic shares outstanding.

Market value of equity is the total dollar value of a company's equity and is also known as market capitalization. This measure of a company's value is calculated by multiplying the current stock price by the total number of outstanding shares. A company's market value of equity is therefore always changing as these two input variables change. It is used to measure a company's size and helps investors diversify their investments across companies of different sizes and different levels of risk.

Investors looking to calculate market value of equity can find the total number of shares outstanding by looking to the equity section of a company's balance sheet.

A company's market value of equity can be thought of as the total value of the company decided by investors. The market value of equity can shift significantly throughout a trading day, particularly if there are significant news items like earnings. Large companies tend to be more stable in terms of market value of equity owing to the number and diversity of investors they have. Small, thinly-traded companies can easily see double digit shifts in the market value of equity because of a relatively small number of transactions pushing the stock up or down. This is also why small companies can be targets for market manipulation.

Market value of equity is calculated by multiplying the number of shares outstanding by the current share price. For example, on March 28, 2019, Apple stock was trading at $188.72 per share. As of this date, the company's stock buy back program has lowered the shares outstanding from over 6 billion to 4,715,280,000. So the market equity of capitalization is calculated as follows:

Stock Price ($188.72) x Shares Outstanding (4,715,280,000) = $889,867,641,600

For simplicity, people usually quote the above market value of equity as $889.9 billion.

Market value of equity can be compared to other valuations like book value and enterprise value. A company's enterprise value incorporates its market value of equity into the equation along with total debt minus cash and cash equivalents to provide a rough idea of a company's takeover valuation.

The market value of equity is also distinct from the book value of equity. The book value of equity is based on stockholders' equity, which is a line item on the company's balance sheet. A company's market value of equity differs from its book value of equity because the book value of equity focuses on owned assets and owed liabilities. The market value of equity is generally believed to price in some of the company's growth potential beyond its current balance sheet. If the book value is above the market value of equity, however, it may be due to market oversight. This means the company is a potential value buy.

In general, there are three different levels of market capitalization, and each level has its own profile. Companies with a market capitalization of less than $2 billion are considered small capitalization, or small caps. Companies with a market capitalization of between $2 billion and $10 billion are considered medium capitalization stocks, also referred to as mid-caps. Companies with a market capitalization over $10 billion are considered large capitalization, or large caps.