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Although both market value and intrinsic values are a way of evaluating a company, there is a significant difference between the two.
Intrinsic value is an approximation of a company’s actual true value. It does not depend on market value. Intrinsic value is one of the core metrics used to evaluate a company’s worth.
The basic ideology is to make investments in companies that have a higher intrinsic or true value instead of those whose value is dictated by the market. Intrinsic value can be considered to be a part of fundamental analysis. While estimating the intrinsic value, both tangible and intangible parameters are considered. 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.
The market value of a company is its value as represented by the share price of the company. Hence, market value can be considerably 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. One should always know that the market value of a company is obtained from its present share price, and it does not always reflect the accurate worth of the company. Therefore, the market value of a company can be considered just as an estimate of public sentiment towards the 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.
Another major difficulty in estimating the market value of the company comes when one has to account illiquid assets such as its real estate and other business operations. 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.
|Parameter||Intrinsic Value||Market Value|
|Definition||Actual value of the company, and does not depend on the share price||It is represented the current share price|
|The asset is undervalued and should be purchased when||Higher||Lower|
|The asset is overvalued and should be sold when||Lower||Higher|
|Valuation is correct||Intrinsic value = market value||Intrinsic value = market value|
Knowing the importance of both intrinsic and market value of the company will help potential investors in making their investment-related decisions with respect to the company’s stocks.