Know-How Exchange : Research/Metrics

Firm value is related to expected future cash flow - so a balance sheet or income statement is only a first step. From it, I would take the current assets (= book value), and then calculate the expected future cash flow first by assuming it remains the same in the future (assuming a reasonable discount rate, anywhere 4-12%). On top of that, investors may expect higher future cash flows based on the brand equity the firm enjoys, or expected growth in its product or customer base. These last two factors may explain why a firm's value (as defined by stock market capitalization = stock price *shares) is higher than the book value. In fact, many recent papers use the ratio of 'market to book' value to demonstrate the firm value impact of marketing actions (eg Pauwels et al, Journal of Marketing, october 2004)

Hope this helps - I hoped the answer would be simpler but it represents a long and ongoing debate in both finance and marketing research!