How is Value Determined?

valueValue 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. It is used to quantify the worth of something, and different types can be applied to explain various situations.

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. It can also relate to how people feel about something, describing how something is regarded and its importance to the individual.

Relative value is a method of determining an asset’s worth that takes into account the worth of similar assets. In contrast, absolute value 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 worth relative to its peers.

Liquidation 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. It is determined by assets such as real estate, fixtures, equipment and inventory. Intangible assets are not included. Liquidation value is especially important for those that work with bankruptcies and workouts. There are generally four levels of valuation for business assets: market, book, liquidation, and salvage. Each level provides a way for accountants and analysts to classify the aggregate of assets.

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.

A consumer’s perceived worth of a good or service affects the price he is willing to pay. While actual worth is a reflection of the true costs of production coupled with the costs associated with the product’s sale, perceived worth is based on customer opinion.

 


 

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