Differences Between Market Value and Intrinsic Value for a Financial Instrument

Business valuation in Malaysia and around the world is composed of many different factors. A number of financial instruments’ valuation factors must be considered to make sure an organization is valued correctly. 


Otherwise, there is always a risk of inaccurate or even fraudulent valuation.  


Both market and intrinsic value play an integral role in the financial evaluation of a business. Let’s discuss these types of values, along with their differences, in detail. 


What is Intrinsic Value?

The approximated true value of an organization is called the intrinsic value. It is not dependent on the market value. Generally, intrinsic value is one of the most important financial metrics to consider when evaluating the worth of a company.  


The basic business work dictates that investments are made in companies with higher intrinsic value instead of businesses that are heavily impacted by the market. As a result, intrinsic value is a significant part of fundamental analysis and business valuation in Malaysia

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Estimation of Intrinsic Value

Both tangible and intangible factors have to be considered to estimate the intrinsic value. It also includes various other factors, such as market analysis, financial statements, and evaluating the overall business plan of the company. 


It is evident that estimating the intrinsic value is a complicated process. Therefore, it is best to let the accounting experts and audit firms in Malaysia handle it so that an accurate estimate can be obtained. 


The inclusion of variables, especially the intangible assets of the company, can make the approximated intrinsic value vary to a large extent.  


How the intrinsic value is estimated also depends on the method used by the accountant or auditor to value the business. 


Some analysts might use the discounted cash flow analysis to include future earnings in their calculations. On the other hand, some might use only current liquid value or book value to obtain intrinsic value. 


Complexities of the balance sheet can also affect the process of evaluating intrinsic value. Since the internal team of a company is responsible for preparing balance sheets, they might not actually represent the assets and liabilities. 


As a result, engaging the services of an independent audit firm in Malaysia becomes important to ensure maximum transparency. 

What is Market Value?

As the name suggests, the market value of a company is the value that is represented by the share price of the company. Therefore, the market value of the company can be significantly higher or lower than its intrinsic value. 


Generally,  market value is used to represent the capitalization of a listed company. Its business valuation is easier because all you have to do is figure out how much each share is worth now and how many shares are still in circulation. 


Accuracy of Market Value

Keep in mind that the market value of an organization is obtained from the current share price, so it might not actually reflect the correct worth of the company. 


Hence, the market value of an organization is typically considered to be an estimate of public sentiment towards the business. 


Stakeholders and investors also pay special attention to the market value of a company as it represents its demand and supply. Moreover, it shows the interest level of the investors in a company. 

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Estimating the Market Value

A significant challenge in estimating the market value of a company is considering its liquid account assets such as real estate. It results in the market value being higher than the intrinsic value, especially when there is a strong demand for investments, leading to overvaluation.

However, if there is not enough demand for investments, it can cause the company to get severely undervalued as well.

Key Differences Between Intrinsic Value and Market Value

The following are the key differences between intrinsic value and market value:

Intrinsic Value Market Value
Estimated value of a company and does not depend on the share prices
Represented by the current share price
When the intrinsic value is higher, the asset is undervalued and should be bought.
Lower market value shows that the asset is undervalued and should be bought.
Lower intrinsic value shows that the asset is overvalued and should be sold.
Higher market value shows that the asset is overvalued and should be sold.
Business evaluation with intrinsic value is comparatively difficult.
Business evaluation with market value is comparatively easier.

In a Nutshell

Both intrinsic and market value hold great significance in financial instruments’ valuation purposes. It is important for organizations to evaluate accurate intrinsic value and market value to provide complete and transparent information to investors and stakeholders. 


Relying on professional audit firms in Malaysia will help you in completing the business valuation procedures accurately.