Market value per share is one of the metrics investors use when selecting stocks. The big question about any stock is whether the shares are worth buying. The different market value ratios use different formulas to determine that. Market value per share is simply the current market price the stock sells for.
Market Value Ratios
Investors have many ways to judge the value of a stock. Market value ratios are useful because they use an objective market value formula rather than subjective standards:
- Book value per share. Take the stockholder's equity, the value of company assets less company debts. Divide equity by the number of shares issued. If, say, the company's worth $10 million and there are 10,000 shares, the book value of each share is $1,000.
- Dividend yield is the ratio of dividends to stock price. Divide the annual dividends issued per share by the share price to get dividend yield. A $5 dividend on a $25 share gives 20 percent yield.
- Earnings per share. This divides the company's annual earnings by the number of shares.
- Price/earnings ratio. To calculate this market value ratio, divide the price per share by the earnings per share.
- Market value per share. The market value per share is simply the going price of the stock. The market price per share formula says this is equal to the total value of the company, divided by the number of shares.
Why So Many Ratios?
Investors use different market value ratios because they have different questions they want to be answered.
- The dividend yield tells how much of a return on investment they'll get while they hold the shares.
- Book value is a useful tool for evaluating the market value per share. If the book value is $1,000 and the stock trades at $750, that might indicate it's a bargain.
- Price/earnings ratio is a good tool for comparing the value of competing companies.
- Calculating earnings per share gives investors an estimate of what the company should be worth.
Market Value Per Share
As a rule, the market value per share is whatever the stock currently trades at. That trading price is usually based on several underlying factors:
- The company's reported income.
- The cash flows the company reports. Cash flow measures how much money actually goes into and out of the corporate accounts, whereas income includes money owed but not paid.
- Does the company have a stock buyback program? A company that can buy back shares when the price drops too low can set a floor for the market value.
- What do investors think of the company's future?
- Is the economy strong, or are we headed for a slump?
If the company trades publicly on the stock exchange, they have to make their audited financial statements, including the balance sheet, the cash flow statement and the income statement, available to the public. Investors can use the information in the statements to determine cash flow, income and other things influencing the market value.
Market Value Risks
The problem with using any market value formula to judge stocks is that many things can skew the formula and give a wrong answer. Market value per share is no exception. There are many tricks companies and conniving investors can use to artificially inflate market value.
This is particularly true if the company doesn't trade shares on a stock exchange or very few shares are up for sale. With a statistically small sample of genuine stock sales, an unscrupulous trader can easily pump up the market value with a few trades. Then the trader turns around and sells larger blocks of shares to other investors, after which the price drops to its true level.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com