Valuation of Shares

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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 Securities20.40
ICICI Securities17.5

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 Bank3.84
AU Small Finance Bank4.24

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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