What is the worth of a company?

Evening "chai" at our office is a very lively event. 4-5 of us gather over tea and discuss almost anything under the sun and move from one topic to another quite fast. One such topic that came up for discussion was started by a friend who was surprised at how "Tata's are worth USD 83.3 bn whereas Facebook is worth close to USD 100 bn".

I had a feeling that somewhere there was a flaw in such a conjecture but was not able to put it across in absence of actual facts. Coming back to the desk, Googling helped me a bit. So to put facts in order.

i. Tata's worth (I will come to the question of what this term means) is not USD 83 bn. USD 83 bn is actually its revenues in the year 2010-11. Information source - Tata website
ii. Facebook's revenue in the first half of 2011 was USD 1.6 bn. Information source TechCrunchAnother projection puts its revenues at USD 4.27 bn.

iii. The market capitalization of Tata group companies is around USD 77 bn. Information Source Tata website Detailed break up too is available on the website This is just the valuation of Tata companies that are listed. There may be companies in the group which are not listed.
iv. Facebook's project market capitalization is around 82 bn USD. Information source Vator

Now in light of these facts, the point put forward by my friend still holds true i.e Facebook, a young company started in 2004, has a market capitalization which is more than Tatas, a group which is only 7 years short of celebrating its 150 years of existence.

Now, the sky high valuations for tech companies seems to be a sign of irrational exuberance, to borrow from Alan Greenspan. Sometimes there may be a connect between revenues and valuations like Google; sometimes the market valuation may be in expectation of a future revenue windfall - a la Twitter.

Coming back to the Tata-Facebook comparison, however, we see that the gap between revenues is very wide. Tatas are earning USD 83 bn worth of real money whereas the same figure for Facebook is USD 4.2 bn.

In light of the above point, I would like people's views on the worth of a company. Can we use the terms worth and value interchangeably? One obvious school of thought uses the straightforward market capitalization of a company to arrive at the worth. There may be other schools of thought and other methods that may consider other pointers to arrive. Would love to have your thoughts on this and also references to links on the value of a company.

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