Intrinsic Value and Market Value of the Company
What is the Intrinsic Value?
The approximation of a company’s actual true value is called intrinsic value. It is independent of the market value of the company. It is used to evaluate the worth of the company. It is advised to invest in companies that have a higher intrinsic value instead of those whose value is dictated by the market.
Intrinsic value is a part of fundamental analysis. Both tangible and intangible parameters are considered when estimating intrinsic value. This includes market analysis, financial statements, and the business plan of the company. It is fairly a complicated procedure that one will have to go through when estimating the intrinsic value of a company. As there exist various variables such as the intangible assets of the company, the approximation of the true value of a given company may vary vastly across analysts.
A few analysts will make use of the discounted cash flow analysis to cover future earnings in their calculation while some consider only the current liquid value or the book value which is reflected in the company’s latest balance sheet. Furthermore, challenges arise from the balance sheets themselves. This is due to the fact that the balance sheets are prepared internally by the company and may not always accurately represent the assets and liabilities.
What is Market Value?
The market value of a company is the value which is represented by the share price of the company. It may be lower or higher than the company’s intrinsic value. The market value is often used to represent the market capitalisation of a listed company and is calculated by obtaining the product of the current share price and the number of outstanding shares of the company.
It does not always reflect the accurate worth of the company. The public sentiment towards the company can be estimated through the market value of a company. This is because of the fact that the market value represents the demand and supply in the market, and how interested the investors are when it comes to investing in the company.
The market value of a company is higher than its intrinsic value when there exists a strong demand for investments which will lead to overvaluation. The vice versa will hold true if there is not much demand for investments, and this may lead to the company being undervalued.
Intrinsic value is the actual value of the company and does not depend on the share price, while market value represents the current share price of the company. The asset is undervalued and should be purchased when the intrinsic value is higher and the market value is lower. The asset is overvalued and should be sold when the intrinsic value is lower and the market value is higher.