What s a Company Worth?

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What's a Company Worth?

Determining the value of a company is a little different from valuing tangible goods like cars and houses . In both cases, you would list the real value of the components and the real value of the liabilities, add the whole thing together, and the end sum would be the value of the company.

For example, at Widget Inc. you could determine that the current stock of widgets is worth $100, the office equipment and supplies are worth $100, and the building Widget Inc. owns is worth $100. In addition, Widget Inc. owes its suppliers $50 and still has an outstanding mortgage of $50, so you would subtract that $100 total and the end result of $200 would be Widget Inc.'s value or net worth.

It gets a little more complicated than that, as the real value of a company is often in things that are less tangible, name recognition, for example. Most people will buy Coca-Cola before they buy generic soda, so there's actually value in owning the name Coca-Cola. The name itself sells cans of soda. That's an edge that Coca-Cola has on the generic competition. Unfortunately, that edge can't be documented on anything like a balance sheet. That edge is one of Coca-Cola's assets, and it makes Coca-Cola a more valuable company.

Companies are often valued not at what they currently are, but at what they are capable of becoming. This is called growth potential. For example, let's say yours is the only company in America that makes Widgets from plastic; all the other companies make theirs from apples. This year, there's a huge freeze and all the apple crops are lost. Since your little Widget company is about to become the only company who can still produce Widgets, its value will go through the roof even if at this moment you haven't actually changed a thing.

Plain English

An asset is an item on a balance sheet that shows the book value of something owned. Anything you own that's valuable is an asset.

On the other side are those things that detract from a company's value, known as liabilities. A liability can include anything such as outstanding debt, an inferior market share or position, or a bad reputation. While a debt can certainly make its way onto the company's balance sheet, again, the more intangible items such as a bad reputation or recent news events won't be listed.

The biggest complication, however, is that you can't really put a price tag on these types of things (what exactly is a good reputation worth? how much does a bad reputation hurt a company's sales?), so stocks are actually worth only what people think they are worth. Or, in other words, stocks are worth what people are willing to pay for them.

If you are willing to paint someone's house for $40, and someone is willing to pay you $40 to do it, that's exactly what your service is worth. If you want $50 but can't find anyone to pay that, then the service may not be worth $50. And the reverse is true too. If you agree to $40, not knowing that someone would be willing to pay you $50, then the service is actually worth $50 and you have just undersold yourself. In economic terms, this phenomenon is called supply and demand. It's what drives the stock market and determines the prices of all stocks.

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