For a publicly traded company, the current share price multiplied by the number of outstanding shares indicates the market value of the company's equity. Add in the value of the company's debt, and you have the total value of the enterprise. Think of it this way: The total value of a company is the equity of the owners plus any outstanding debt. Why add in the debt? Consider your own home. When you go to sell your house, you don't set the price at the level of your equity in the property. Its value is the total of the outstanding debt and your equity interest. Likewise, the value of a company is shareholder's equity plus the liabilities. This is often referred to as the enterprise value.
For a public company whose shares are priced by the market every business day, pricing the equity is straightforward. But what about the closely held corporation, whose share price is generally unknown, since such a firm does not trade in a public market? We can reach a value estimate by using the known price-earnings multiple (often called the P/E ratio) of similar enterprises that are publicly traded. The price-earnings approach to share value begins with this formula:
Share Price = Current Earnings x Multiple
For a public company whose shares are priced by the market every business day, pricing the equity is straightforward. But what about the closely held corporation, whose share price is generally unknown, since such a firm does not trade in a public market? We can reach a value estimate by using the known price-earnings multiple (often called the P/E ratio) of similar enterprises that are publicly traded. The price-earnings approach to share value begins with this formula:
Share Price = Current Earnings x Multiple
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