Valuation of shares is like figuring out how much a slice of a company is worth. It is the process of determining the fair price of a company’s shares, considering factors like its earnings, assets, and market perception.
Investors use various methods, such as looking at profits, assets, or comparing with similar companies, to estimate the true value of a share
- Methods of Valuation:
Earnings-Based Valuation:
This method looks at a company’s earnings (profits). The price of a share is often calculated based on how much money the company is making.
Asset-Based Valuation:
Here, you look at the company’s assets (like buildings, equipment, cash) and calculate the share price based on these.
- PE Ratio (Price-to-Earnings Ratio):
This is a common tool to evaluate a company’s value. It is the ratio of the share price to the company’s earnings per share. A high PE ratio may suggest that investors expect higher future earnings.
P/E = Share Price/ Earning per Share
Let’s take an example-
| P/E Ratio | |
| HDFC Securities | 20.40 |
| ICICI Securities | 17.5 |
3. PB Ratio (Price-to-Book Value Ratio):
A company’s price-to-book ratio is the company’s current stock price per share divided by its book value per share (BVPS). This shows the market valuation of a company compared to its book value.
P/B= Market price per share / Book value per share
Let’s take an example–
| P/B Ratio | |
| Fincare Small Finance Bank | 3.84 |
| AU Small Finance Bank | 4.24 |
It’s important to recognize that each valuation method has its strengths and weaknesses, and selecting the most appropriate method depends on the circumstances and characteristics of the company being valued.
A thorough analysis often involves a combination of quantitative and qualitative factors to arrive at a well-rounded assessment of a company’s value.
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