Value is the monetary, material, or assessed worth of an asset, good, or service. "Value" is attached to a myriad of concepts including shareholder value, value of a firm, fair value, book value, enterprise value, net asset value (NAV), market value, private market value, value stock, value investing, intrinsic value, value-added, economic value added, value chain, value proposition, and others. Some of the terms are well-known business jargon, and some are formal terms for accounting and auditing standards to report to the Securities and Exchange Commission (SEC).
Breaking Down Value
This section will discuss the value of a firm versus the valuation of a firm. These two terms are often used interchangeably, but for investors, the value of a firm is a number, whereas valuation is expressed as a multiple to earnings, EBIT, cash flow or another operating metric. In corporate finance, the value of a firm is most often derived through discounted cash flow (DCF) analysis, a model which essentially discounts free cash flows of the firm to the present. The result will be intrinsic value — a number, whether in hundreds of thousands, millions, or billions. The value per share of the firm can then be calculated by simply dividing the value by shares outstanding.
"What's the valuation of the firm?" is not the same question as "What is the value of the firm?" The market valuation would be a multiple of the current trading price to earnings per share (EPS), for example, the stock price to book value per share, or another price multiple. Using price multiples allows for valuation comparisons across peer groups. An investor cannot make sense that the value of firm A is $4 billion, and firm B is $9 billion. To make a more informed investment decision, the investor is better off knowing that the valuation of firm A is 15x EPS, and firm B is 18x EPS.
Comparing Intrinsic Value and Market Value for Trading Opportunities
Estimating the intrinsic value of a firm (and therefore, value per share) and then comparing these numbers with the current market value of a security can lead to trading opportunities. For example, if the value of a firm is estimated at $50 per share, but the stock is trading at $35 per share in the market, an investor might consider going long the stock. On the other hand, if the stock is trading at $85 per share, far above intrinsic value, the investor could consider shorting the stock.