Determining Value

Value is the monetary, material or assessed worth of an asset, good or service. In accounting, value describes what something is worth in terms of something else. For example, the value of a loaf of bread might be $3; the $3 for the loaf of bread would represent the generally accepted worth of the bread.

The value of anything is always determined by the buyer.

In economics, value describes the merit of the benefits of ownership. The benefits of ownership include utility, the pleasure or satisfaction gained by consumption of a particular good or service; and power, the ability of a good or service to be exchanged for other goods, services or money.

Value is used to quantify the worth of something, and different types of value can be applied to explain various situations. For example, the value of a company can be described in terms of its intrinsic value, book value, actual cash value or market value.

Value can be perceived, as in the way consumers perceive the ability of a good or service to meet their needs and their willingness to pay for the good or service.

The value of an asset, good or service can change over time. For example, the price of a security fluctuates.

Value can also relate to how people feel about something, describing how something is regarded and its importance to the individual. For example, a memento may have very little monetary value but have significant sentimental value.

Relative Value

Relative value is a method of determining an asset’s value that takes into account the value of similar assets. In contrast, absolute value looks only at an asset’s intrinsic value and does not compare it to other assets. Calculations that are used to measure the relative value of stocks include the enterprise ratio and price-to-earnings ratio.

When value investors are considering which stocks to invest in, they do not just look at the financial statements of the companies whose stocks they are interested in buying to make sure that the company is profitable and well-managed and that the stock is underpriced. They also look at the financial statements of competing companies to assess the stock’s value relative to its peers.

Liquidation Value

Liquidation value is the total worth of a company’s physical assets when it goes out of business or if it were to go out of business. Liquidation value is determined by assets such as real estate, fixtures, equipment and inventory. Intangible assets are not included in a company’s liquidation value.

Liquidation value is usually lower than book value but greater than salvage value. The assets continue to have value, but due to a limited time frame, they must be sold at a loss to book value.

Liquidation value does not include intangible assets. Intangible assets include a business’s intellectual property, goodwill and brand recognition. However, if a company is sold rather than liquidated, both liquidation value and intangible assets are considered to determine the company’s going-concern value. Value investors look at the difference between a company’s market capitalization and its going-concern value to determine whether the company’s stock is currently a good buy.

Market vs Book vs Liquidation vs Salvage

There are generally four levels of valuation for business assets: market value, book value, liquidation value and salvage value. Each level of value provides a way for accountants and analysts to classify the aggregate value of assets. Liquidation value is especially important for those that work with bankruptcies and workouts.

Market value is generally the highest value of assets, though it could be lower than book value if the value of the assets has gone down in value due to market demand rather than business use.

The book value is the value of the asset as listed on the balance sheet. The balance sheet lists assets at the historical cost, so the value of assets may be higher or lower than market prices. In an economic environment with rising prices, the book value of assets is lower than the market value. The liquidation value is the expected value of the asset once it has been liquidated or sold, presumably at a loss to historical cost. Finally, the salvage value is the value given to an asset at the end of its useful life; in other words, this is the scrap value.

Perceived Value

Perceived value is the worth that a product or service has in the mind of the consumer. For the most part, consumers are unaware of the true cost of production for the products they buy; instead, they simply have an internal feeling for how much certain products are worth to them. To obtain a higher price for products, producers may pursue marketing strategies to create a higher perceived value for their products.

A consumer’s perceived value of a good or service affects the price he is willing to pay. While actual value is a reflection of the true costs of production coupled with the costs associated with the product’s sale, perceived value is based on customer opinion. It reflects the value of a product as assigned by the aforementioned consumer, which may have little to do with the actual monetary value of the product. Customers place value based on the product’s theoretical ability to fulfill a need and provide satisfaction, also referred to as utility.

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