What is Market Value Analysis?

Market Value is a good barometer of the wealth of shareholders. After all, when you are a listed company, what really matters is what your company is worth in the market.

Jul 28, 2018 06:07 IST India Infoline News Service

What does the Market Value of a company indicate to you? It is the product of the number of shares outstanding and the latest stock price. That means the actual market value or market capitalization of any company keeps shifting at any point of time. Market Value is a good barometer of the wealth of shareholders. After all, when you are a listed company, what really matters is what your company is worth in the market.
 
Market Cap as a measure of wealth accretion
Let us understand the use of Market Value with the illustration of 4 listed stocks that have seen a sharp shift in Market Value since the beginning of the year. Check the table below:
Particulars Reliance Industries Britannia Industries Tata Steel Tata Motors
Number of Shares outstanding 633.65cr 12.01cr 112.65cr 288.74cr
Market Price as on July 24 Rs1,115.70 Rs6,426.75 Rs523.00 Rs261.50
Market Cap on July 24, 2018 Rs7,06,963cr Rs77,185cr Rs58,916cr Rs75,506cr
Market Cap on Jan 1, 2018 Rs5,76,463cr Rs56,906cr Rs81,356cr Rs1,22,556cr
Market Cap Change Rs1,30,500cr Rs20,279cr Rs(-22,440cr) Rs(-47,050 cr)
 
By doing a time series analysis of the Market Value of a company, it is easy to figure out which companies have created value for shareholders and which are the companies that have depleted shareholder value. In the above instance, clearly it is Reliance Industries and Britannia that have expanded shareholder wealth in the calendar year 2018. During the same period of 7 months, Tata Steel and Tata Motors have actually depleted shareholder wealth. This can be partly explained due to the downside in the steel cycle for Tata Steel as well as fears of slowdown in JLR demand for Tata Motors.
 
Market Value Accretion versus Market Value Added
These are two different kinds of measures and they both need to be understood in a different context altogether. For example, Market Value Accretion is just the change in the market value. It is a time series measure of the Market Value of a company. In our above comparison, it is very clear that since the beginning of 2018, Britannia and RIL have positive accretion, while Tata Steel and Tata Motors have experienced negative Market Value Accretion. Market Value added is a slightly different concept and it is more reference to how much value a company has raised compared to funds raised.
 
Market Value Added (MVA) actually adds a new additional dimension to Market Value Accretion. MVA measures the difference between the market value of the company and the equity of the company. Here total equity includes share capital, share premiums and general reserves created out of profits. Let us again take an illustration of a company over a 2-year period and see how the Market Value Added (MVA) has moved.
Particulars Company X (2017) Particulars Company X (2018)
Share Capital
10 lakh shares of 10 each
Rs1,00,00,000 Share Capital
12 lakh shares of 10 each
Rs1,20,00,000
Share Premium Rs2,50,00,000 Share Premium Rs3,50,00,000
General Reserves Rs1,50,00,000 General Reserves Rs1,80,00,000
Total Equity Rs5,00,00,000 Total Equity Rs6,50,00,000
Stock Price Rs45 Stock Price Rs50
Market Value Rs45,00,00,000 Market Value Rs60,00,00,000
Market Value Accretion Rs15,00,00,000
Market Value Added Rs40,00,00,000 Market Value Added Rs53,50,00,000
 
How do we interpret this deluge of numbers? It is actually quite simple. The total equity of the company has gone up by 30% because the capital base has expanded due to raising funds at a premium. At the same time, the reserves are also up due to profits being ploughed back into the company. However, the real picture is evident when we compare the Market Value Accretion with the Market Value Addition. The Market Value Accretion is Rs15cr but the Market Value Added is only Rs13.50cr. When the MVA is lower than the Market Cap Accretion, it is an indicator that the company has not been able to create wealth commensurate with the expansion of equity. MVA forces the company to compensate not only for the share capital but also for the share premium and the general reserve.
 
Three approaches to evaluating Market Value
Market Value Added is one of the best ways to detect if the company is creating value that is commensurate with the increase in equity. Remember, equity dilutes net worth and hence needs to be factored in. There are three ways to look at Market Value.
  • Firstly, the Market Value is looked as a ratio of the total profits of the company. This is nothing but a proxy for the P/E ratio. You can also look at the inverse of the P/E with the earnings yield. This can be compared to yields on debt to measure attractiveness of equity.
  • Market Value can also be looked at in terms of its ratio of the equity. This is measured by the Price/Book Value ratio. This measure is more useful for banks and financials.
  • Finally, you can also look at the dividend yield by dividing the total dividends declared by the Market Value of a company. At an overall market level, this dividend yield is a good measure of undervaluation/overvaluation.

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