Friday, August 23, 2013

VALUATION


You are interested to buy a Tiny (Small scale industry) industry which is coming for sale. The owner of the said company Bargains for more than 3 times of the present profit, a successful industry. According to you, the Machineries with all accessories connected with the entire Building and Land alone is enough to be given money. If you are starting that same said business, what may be the expenses, up to that level you can afford money, Naturally. Then why he is expecting more? What is the reason? You are confused and Questioning within yourself !   
Similarly you are ready to buy a Residential House in an Apartment in a Busy Area. In that area the market price/sq.ft is around Rs.2000/-. Your friend who has also booked a House in that Apartment for the same price. Even in Newspapers the market price of that area is predicted as the same price. After confirming, you are deciding to buy that house. Your decision is based on the market price. It is called as a type of valuation.    

Whenever people talk about equity investments, one must have come across the word "Valuation". In financial parlance, Valuation means how much a company is worth of. Talking about equity investments, one should have an understanding of valuation.

Valuation means the intrinsic worth of the company. There are various methods through which one can measure the intrinsic worth of a company. This section is aimed at providing a basic understanding of these methods of valuation. They are mentioned below:

You have said as a Type. It means is there any other types in valuing. Yes, there are, 

1)      In future, the gains able to be obtained from that house can be calculated and
          predictable as present cost. 
2)      If you are constructing a House for your own then the actual expenses. 
3)      Supposing if you are purchasing only for investment, if the real Estate sector goes down, 
          then the actual value in that period.   
                  
In the same manner, stocks valuation can also be valued in several ways! They are given below, 

1)      P/E Yield Method,
2)      Book Value Method,
3)      Market value Method,
4)      Replacement cost Method,
5)      Discounted cash flow Method,
6)      Worst Case/ Best Case Method.

The above methods can be seen in detail as follows ;-  

1)      P/E Yield Method,  

The stock market price divided by the stocks income is called P/E. The stocks you ought to buy, P/E can be compared with the same sector based another stock. While comparing either Low or High P/E will be known. But you must be aware in carefully selecting the Organization. It is also termed as “PEER GROUP”. The stocks we are ready to purchase, and company both must be in same sector, of same type of Business. Both Companies (Turn over) sales more or less must be same. 
                    
If you are selecting Indian Bank as your choice. It is an Public Sector Bank. An another public sector bank can alone be compared for our Analysis. Comparing with another Bank and Finance Instutions is not advisable. Even in public sector 2 Equivalent banks can alone be compared. Indian Bank cannot be compared with State Bank of India. But it can be compared with Indian Overseas Bank. Because both are having their Branches in South India, commonly. Gross income is almost nearby, 

Indian Banks as on 31.03.2011,                   Total income – 10,543 Crores,
Indian Overseas Banks as on 31.03.2011, Total income – 13,327 Crores,  
                            
Similarly common Scalar quantities can be Utilized and PEER GROUP can be formed.

INDIAN BANK can be compared with     CORPORATION BANK,
INDIAN BANK can be compared with     SYNDICATE BANK,
INDIAN BANK can be compared with     ORIENTAL BANK,
INDIAN BANK can be compared with     UNION CO-OPERATIVE BANK,
INDIAN BANK can be compared with     ALLAHABAD BANK,  

Even though Allahabad Bank is having most of its Branches in North India it can also be taken for our comparison.

Now we have formed a same factored “PEER GROUP”. Let us see our Peer Groups P/E Average ( Having Latest income statement ) Indian Banks P/E Peer Group Average Vs ----- closely held other banks can be compared. Why it differs can be Analyzed ! With other scalar quantities ( P/BV, Dividend Yield, Debts yet to be received percentage, Income growth, No: of Branches, Shareholding pattern, and others ) can be compared. Then we can come to a conclusion why it differs ? With those results buying Indian Bank stocks or not can be decided.
                    
The above seen valuation can only be advisable for stocks listed in Stock Market. Because we can get all the Data’s required for us. Let us assume that if you are trying to buy a company not listed in the stock market. Then the stock market listed same sector based companies P/E average can be taken, to be purchased. Companies net gain when multiplied with the average P/E, the result shows the companies resultant value. From the above value, how less if possible to buy is much better.        
    
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall.

In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of their intrinsic value of the stock, based on predictions of the future cash flows and profitability of the business. Fundamental analysis may be replaced or augmented by market criteria – what the market will pay for the stock, without any necessary notion of intrinsic value. These can be combined as "predictions of future cash flows/profits (fundamental)", together with "what will the market pay for these profits?". These can be seen as "supply and demand" sides – what underlies the supply (of stock), and what drives the (market) demand for stock?

In the view of others, such as John Maynard Keynes, stock valuation is not a prediction but aconvention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories.

Fundamental criteria (fair value)

The most theoretically sound stock valuation method, called income valuation or the discounted cash flow (DCF) method, involves discounting of the profits (dividends, earnings, or cash flows) the stock will bring to the stockholder in the foreseeable future, and a final value on disposal. The discounted rate normally includes a risk premium which is commonly based on the capital asset pricing model.

In July 2010, a Delaware court ruled on appropriate inputs to use in discounted cash flow analysis in a dispute between shareholders and a company over the proper fair value of the stock. In this case the shareholders' model provided value of $139 per share and the company's model provided $89 per share. Contested inputs included the terminal growth rate, the equity risk premium, and beta.

STOCK VALUATION METHODS

Stocks have two types of valuations. One is a value created using some type of cash flow, sales or fundamental earnings analysis. The other value is dictated by how much an investor is willing to pay for a particular share of stock and by how much other investors are willing to sell a stock for (in other words, by supply and demand). Both of these values change over time as investors change the way they analyze stocks and as they become more or less confident in the future of stocks.

The fundamental valuation is the valuation that people use to justify stock prices. The most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio. This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes. This form of valuation is typically what drives long-term stock prices.

The other way stocks are valued is based on supply and demand. The more people that want to buy the stock, the higher its price will be. And conversely, the more people that want to sell the stock, the lower the price will be. This form of valuation is very hard to understand or predict, and it often drives the short-term stock market trends.

There are many different ways to value stocks. The key is to take each approach into account while formulating an overall opinion of the stock. If the valuation of a company is lower or higher than other similar stocks, then the next step would be to determine the reasons.

EARNINGS PER SHARE (EPS).

EPS is the total net income of the company divided by the number of shares outstanding. They usually have a GAAP EPS number (which means that it is computed using all of mutually agreed upon accounting rules) and a Pro Forma EPS figure (which means that they have adjusted the income to exclude any one time items as well as some non-cash items like amortization of goodwill or stock option expenses). The most important thing to look for in the EPS figure is the overall quality of earnings. Make sure the company is not trying to manipulate their EPS numbers to make it look like they are more profitable. Also, look at the growth in EPS over the past several quarters / years to understand how volatile their EPS is, and to see if they are an underachiever or an overachiever. In other words, have they consistently beaten expectations or are they constantly restating and lowering their forecasts?

The EPS number that most analysts use is the pro forma EPS. To compute this number, use the net income that excludes any one-time gains or losses and excludes any non-cash expenses like stock options or amortization of goodwill. Then divide this number by the number of fully diluted shares outstanding. You can easily find historical EPS figures and to see forecasts for the next 1–2 years by visiting free financial sites such as Yahoo Finance (enter the ticker and then click on "estimates").

By doing your fundamental investment research you'll be able to arrive at your own EPS forecasts, which you can then apply to the other valuation techniques below.

Price to Earnings (P/E).  

Now that you have several EPS figures (historical and forecasts), you'll be able to look at the most common valuation technique used by analysts, the price to earnings ratio, or P/E. To compute this figure, take the stock price and divide it by the annual EPS figure. For example, if the stock is trading at $10 and the EPS is $0.50, the P/E is 20 times. To get a good feeling of what P/E multiple a stock trades at, be sure to look at the historical and forward ratios.

Historical P/Es are computed by taking the current price divided by the sum of the EPS for the last four quarters, or for the previous year. You should also look at the historical trends of the P/E by viewing a chart of its historical P/E over the last several years (you can find on most finance sites like Yahoo Finance). Specifically you want to find out what range the P/E has traded in so that you can determine if the current P/E is high or low versus its historical average.

Forward P/Es reflect the future growth of the company into the figure. Forward P/Es are computed by taking the current stock price divided by the sum of the EPS estimates for the next four quarters, or for the EPS estimate for next calendar of fiscal year or two.
P/Es change constantly. If there is a large price change in a stock you are watching, or if the earnings (EPS) estimates change, the ratio is recomputed.

Growth Rate. 
Valuations rely very heavily on the expected growth rate of a company. One must look at the historical growth rate of both sales and income to get a feeling for the type of future growth expected. However, companies are constantly changing, as well as the economy, so solely using historical growth rates to predict the future is not an acceptable form of valuation. Instead, they are used as guidelines for what future growth could look like if similar circumstances are encountered by the company. Calculating the future growth rate requires personal investment research. This may take form in listening to the company's quarterly conference call or reading press release or other company article that discusses the company's growth guidance. However, although companies are in the best position to forecast their own growth, they are far from accurate, and unforeseen events could cause rapid changes in the economy and in the company's industry.

And for any valuation technique, it's important to look at a range of forecast values. For example, if the company being valued has been growing earnings between 5 and 10% each year for the last 5 years, but believes that it will grow 15 - 20% this year, a more conservative growth rate of 10 - 15% would be appropriate in valuations. Another example would be for a company that has been going through restructuring. They may have been growing earnings at 10 - 15% over the past several quarters / years because of cost cutting, but their sales growth could be only 0 - 5%. This would signal that their earnings growth will probably slow when the cost cutting has fully taken effect. Therefore, forecasting an earnings growth closer to the 0 - 5% rate would be more appropriate rather than the 15 - 20%. Nonetheless, the growth rate method of valuations relies heavily on gut feel to make a forecast. This is why analysts often make inaccurate forecasts, and also why familiarity with a company is essential before making a forecast.

PRICE EARNINGS TO GROWTH (PEG) RATIO.

This valuation technique has really become popular over the past decade or so. It is better than just looking at a P/E because it takes three factors into account; the price, earnings, and earnings growth rates. To compute the PEG ratio, divide the Forward P/E by the expected earnings growth rate (you can also use historical P/E and historical growth rate to see where it's traded in the past). This will yield a ratio that is usually expressed as a percentage. The theory goes that as the percentage rises over 100% the stock becomes more and more overvalued, and as the PEG ratio falls below 100% the stock becomes more and more undervalued. The theory is based on a belief that P/E ratios should approximate the long-term growth rate of a company's earnings. Whether or not this is true will never be proven and the theory is therefore just a rule of thumb to use in the overall valuation process.

Here's an example of how to use the PEG ratio. Say you are comparing two stocks that you are thinking about buying. Stock A is trading at a forward P/E of 15 and expected to grow at 20%. Stock B is trading at a forward P/E of 30 and expected to grow at 25%. The PEG ratio for Stock A is 75% (15/20) and for Stock B is 120% (30/25). According to the PEG ratio, Stock A is a better purchase because it has a lower PEG ratio, or in other words, you can purchase its future earnings growth for a lower relative price than that of Stock B. Nerbrand Z. 

Given that investments are subject to revisions of future expectations the Nerbrand Z utilises uncertainty of consensus estimates to assess how much earnings forecasts can be revised in standard deviation terms before P/E rations return to normalised levels. This calculation is best done with I/B/E/S consensus estimates. The market tend to focus on the 12 month forward P/E level but this ratio is dependent on earnings estimates which are never homogenous. Hence there is a standard deviation of 12 month forward earnings estimates.
The Nerbrand z is therefore expressed as
where H[P/E] = normalised P/E, e.g. a 5 year historical average of 12 month forward P/E ratios.
E12 = mean 12 month forward earnings estimates
stdev(E12) = standard deviation of 12 month forward earnings estimates.

A negative number indicates that earnings can be downgraded before valuations normalise. As such, a negative number indicate a valuation adjusted earnings buffer. For example, if the 12 month forward mean EPS forecast is $10, the price of the equity is $100, the historical average P/E ratio is 15, the standard deviation of EPS forecast is 2 then the Nerbrand Z is -1.67. That is, 12 month forward consensus earnings estimates could be downgraded by 1.67 standard deviation before P/E ratio would go back to 15.

RETURN ON INVESTED CAPITAL (ROIC).

This valuation technique measures how much money the company makes each year per dollar of invested capital. Invested Capital is the amount of money invested in the company by both stockholders and debtors. The ratio is expressed as a percent and you should look for a percent that approximates the level of growth that you expect. In its simplest definition, this ratio measures the investment return that management is able to get for its capital. The higher the number, the better the return.

To compute the ratio, take the pro forma net income (same one used in the EPS figure mentioned above) and divide it by the invested capital. Invested capital can be estimated by adding together the stockholders equity, the total long and short term debt and accounts payable, and then subtracting accounts receivable and cash (all of these numbers can be found on the company's latest quarterly balance sheet). This ratio is much more useful when you compare it to other companies that you are valuing.

RETURN ON ASSETS (ROA).

Similar to ROIC, ROA, expressed as a percent, measures the company's ability to make money from its assets. To measure the ROA, take the pro forma net income divided by the total assets. However, because of very common irregularities in balance sheets (due to things like Goodwill, write-offs, discontinuations, etc.) this ratio is not always a good indicator of the company's potential. If the ratio is higher or lower than you expected, be sure to look closely at the assets to see what could be over or understating the figure.

PRICE TO SALES (P/S).

This figure is useful because it compares the current stock price to the annual sales. In other words, it tells you how much the stock costs per dollar of sales earned. To compute it, take the current stock price divided by the annual sales per share. The annual sales per share should be calculated by taking the net sales for the last four quarters divided by the fully diluted shares outstanding (both of these figures can be found by looking at the press releases or quarterly reports). The price to sales ratio is useful, but it does not take into account any debt the company has. 

For example, if a company is heavily financed by debt instead of equity, then the sales per share will seem high (the P/S will be lower). All things equal, a lower P/S ratio is better. However, this ratio is best looked at when comparing more than one company.
Market Cap. Market Cap, which is short for Market Capitalization, is the value of all of the company's stock. To measure it, multiply the current stock price by the fully diluted shares outstanding. Remember, the market cap is only the value of the stock. To get a more complete picture, you'll want to look at the Enterprise Value.

Enterprise Value (EV). 

Enterprise Value is equal to the total value of the company, as it is trading for on the stock market. To compute it, add the market cap (see above) and the total net debt of the company. The total net debt is equal to total long and short term debt plus accounts payable, minus accounts receivable, minus cash. The Enterprise Value is the best approximation of what a company is worth at any point in time because it takes into account the actual stock price instead of balance sheet prices[citation needed]. When analysts say that a company is a "billion dollar" company, they are often referring to its total enterprise value. Enterprise Value fluctuates rapidly based on stock price changes.

EV to Sales.

This ratio measures the total company value as compared to its annual sales. A high ratio means that the company's value is much more than its sales. To compute it, divide the EV by the net sales for the last four quarters. This ratio is especially useful when valuing companies that do not have earnings, or that are going through unusually rough times. For example, if a company is facing restructuring and it is currently losing money, then the P/E ratio would be irrelevant. However, by applying a EV to Sales ratio, you could compute what that company could trade for when its restructuring is over and its earnings are back to normal.

EBITDA.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is one of the best measures of a company's cash flow and is used for valuing both public and private companies. To compute EBITDA, use a company's income statement, take the net income and then add back interest, taxes, depreciation, amortization and any other non-cash or one-time charges. This leaves you with a number that approximates how much cash the company is producing. EBITDA is a very popular figure because it can easily be compared across companies, even if all of the companies are not profitable.

EV to EBITDA.

This is perhaps one of the best measurements of whether or not a company is cheap or expensive.[citation needed] To compute, divide the EV by EBITDA (see above for calculations). The higher the number, the more expensive the company is. However, remember that more expensive companies are often valued higher because they are growing faster or because they are a higher quality company. With that said, the best way to use EV/EBITDA is to compare it to that of other similar companies.

Approximate valuation approaches

Average growth approximation: Assuming that two stocks have the same earnings growth, the one with a lower P/E is a better value. The P/E method is perhaps the most commonly used valuation method in the stock brokerage industry. By using comparison firms, a target price/earnings (or P/E) ratio is selected for the company, and then the future earnings of the company are estimated. The valuation's fair price is simply estimated earnings times target P/E. This model is essentially the same model as Gordon's model, if k-g is estimated as the dividend payout ratio (D/E) divided by the target P/E ratio.

Constant growth approximation: 

The Gordon model or Gordon's growth model is the best known of a class of discounted dividend models. It assumes that dividends will increase at a constant growth rate (less than the discount rate) forever. The valuation is given by the formula:
 .
and the following table defines each symbol:

Symbol
Meaning
Units
P
estimated stock price
$ or € or £
N
last dividend paid
$ or € or £
k
discount rate
 %
g
 %

Limited high-growth period approximation: When a stock has a significantly higher growth rate than its peers, it is sometimes assumed that the earnings growth rate will be sustained for a short time (say, 5 years), and then the growth rate will revert to the mean. This is probably the most rigorous approximation that is practical.

While these DCF models are commonly used, the uncertainty in these values is hardly ever discussed. Note that the models diverge for k = g and hence are extremely sensitive to the difference of dividend growth to discount factor. One might argue that an analyst can justify any value (and that would usually be one close to the current price supporting his call) by fine-tuning the growth/discount assumptions.

Implied Growth Models

One can use the Gordon model or the limited high-growth period approximation model to impute an implied growth estimate. To do this, one takes the average P/E and average growth for a comparison index, uses the current (or forward) P/E of the stock in question, and calculates what growth rate would be needed for the two valuation equations to be equal. This gives you an estimate of the "break-even" growth rate for the stock's current P/E ratio. (Note : we are using earnings not dividends here because dividend policies vary and may be influenced by many factors including tax treatment).

Imputed growth acceleration ratio

Subsequently, one can divide this imputed growth estimate by recent historical growth rates. If the resulting ratio is greater than one, it implies that the stock would need to experience accelerated growth relative to its prior recent historical growth to justify its current P/E (higher values suggest potential overvaluation). If the resulting ratio is less than one, it implies that either the market expects growth to slow for this stock or that the stock could sustain its current P/E with lower than historical growth (lower values suggest potential undervaluation). 

Comparison of the IGAR across stocks in the same industry may give estimates of relative value. IGAR averages across an industry may give estimates of relative expected changes in industry growth (e.g. the market's imputed expectation that an industry is about to "take-off" or stagnate). Naturally, any differences in IGAR between stocks in the same industry may be due to differences in fundamentals, and would require further specific analysis.

Market criteria (potential price)

Some feel that if the stock is listed in a well organized stock market, with a large volume of transactions, the listed price will be close to the estimated fair value.[citation needed] This is called the efficient market hypothesis.

On the other hand, studies made in the field of behavioral finance tend to show that deviations from the fair price are rather common, and sometimes quite large.[citation needed]

Thus, in addition to fundamental economic criteria, market criteria also have to be taken into account market-based valuation. Valuing a stock is not only to estimate its fair value, but also to determine its potential price range, taking into account market behavior aspects. One of the behavioral valuation tools is the stock image, a coefficient that bridges the theoretical fair value and the market price.

COMPANY VALUATION

NET ASSET VALUE (NAV)

NAV or Book value is one of the most commonly used methods of valuation. As the name suggests, it is the net value of all the assets of the company. If you divide it by the number of outstanding shares, you get the NAV per share.

One way to calculate NAV is to divide the net worth of the company by the total number of outstanding shares. Say, a company’s share capital is Rs. 100 crores (10 crores shares of Rs. 10 each) and its reserves and surplus is another Rs. 100 crores. Net worth of the company would be Rs. 200 crores (equity and reserves) and NAV would be Rs. 20 per share (Rs. 200 crores divided by 10 crores outstanding shares).

NAV can also be calculated by adding all the assets and subtracting all the outside liabilities from them. This will again boil down to net worth only. One can use any of the two methods to find out NAV.

One can compare the NAV with the going market price while taking investment decisions.

DISCOUNTED CASH FLOWS METHOD (DCF)

DCF is the most widely used technique to value a company. It takes into consideration the cash flows arising to the company and also the time value of money. That’s why, it  is so popular. What actually happens in this is, the cash flows are calculated for a particular period of time (the time period is fixed taking into consideration various factors). These cash flows are discounted to the present at the cost of capital of the company. These discounted cash flows are then divided by the total number of outstanding shares to get the intrinsic worth per share.

 The valuation of shares may be done by an accountant for two reasons :

(i) where there is no market price as in the case of a proprietary company.
(ii) where for special reasons, the market price does not reflect the true or intrinsic value of the shares.

The problem does not arise if the shares are quoted on the stock exchange as it provides a ready means of ascertaining the value placed on such shares by the buyers and sellers.

NEED FOR VALUATION

The following are the circumstances where need for valuation of shares arises :

(i) Where companies amalgamate or are similarly reconstructed, it may be necessary to arrive at the value of the shares held by the members of the company being absorbed or taken over. This may also be necessary to protect the rights of dissenting shareholders under the provisions of the Companies Act, 1956.

(ii) Where shares are held by the partners jointly in a company and dissolution of the firm takes place, it becomes necessary to value the shares for proper distribution of the partnership property among the partners.

(iii) Where a portion of the shares is to be given by a member of proprietary company to another member as the member cannot sell it in the open market, it becomes necessary to certify the fair price of these shares by an auditor or accountant.

(iv) When a loan is advanced on the security of shares, it becomes necessary to know the value of shares on the basis of which loan has been advanced.

(v) When preference shares or debentures are converted into equity shares, it becomes necessary to value the equity shares for ascertaining the number of equity shares required to be issued for debentures or preference shares which are to be converted.

(vi) When equity shareholders are to be compensated on the acquisition of their shares  by the Government under a scheme of nationalization, then it becomes necessary to value the equity shares for reasonable compensation to be given to their holders.

FACTORS AFFECTING VALUATION OF SHARES

Valuation of shares depends upon the purpose of valuation, the nature of the business of the company concerned, demand and supply for shares, the government policy, past performance of the company, growth prospects of the company, the management of the company, the economic climate, accumulated reserves of the company, prospects of bonus or rights issue, dividend declared by the directors and many other related factors.

The basic factor (or principle) in the valuation of shares is the dividend yield that the investor expects to get as compared to the normal rate prevailing in the market in the same industry. For small investors, rate of dividend declared by the directors plays an important role in the valuation of shares whereas investors holding bulk of shares (say 15% to 30%) would be able to affect the dividend rate, therefore for them total profits (or earning capacity) play an important part in the valuation of shares. Thus, for a bulk holders of shares net assets including goodwill or capitalized value on the basis of the expected profits may be basis of valuation of shares.

METHODS OF VALUATION

The different methods of valuing shares may be broadly classified as follows :

1. Net Assets Basis (or Intrinsic Value or Break up Value) Method.
2. Earning Capacity (or Yield Basis or Market Value) Method.
3. Dual (or Fair Value) Method.

(1) Net Assets Basis

This method is concerned with the assets backing per share and may be based either :
(a) on the view that the company is a going concern.
(b) on the fact that the company is being liquidated.

(a) Company as a going concern. If this view is accepted, there are two approaches ;
(i) To value the shares on the net tangible assets basis (excluding the goodwill).
(ii) To value the shares on the net tangible assets plus an amount for goodwill.
(i) Net Tangible Assets Basis (Excluding the Goodwill)

Under this method, it is necessary to estimate net tangible assets of the company (Net Tangible Assets = Assets - Liabilities) in order to value the shares, In valuing the figures by this method, care must be exercised to ensure that the figures representing the assets arc sound, i.e., intangible assets and preliminary expenses are eliminated and all liabilities (whether in books or not) are deducted from the value of the tangible assets. Non-trading assets are also included in the assets and the assets are taken at their market value, i.e., replacement value.

Where both types of shares are issued by a company, the shares would be valued as under:

(1) If preference shares have priority as to capital and dividend, then the preference shares are to be valued at par.

(2) After the preference shareholders are paid the net tangible assets are to be divided by the number of equity shares to calculate the value of each share. If at the time of valuation there is an uncalled capital, then the uncalled equity share capital be added with the net tangible assets in order to value the shares fully paid up. The valuation of shares for the shareholders who have calls on arrears will be valued as a percentage on their paid up value with the nominal value of shares. If the company has equity shares of varying face value, the total replacement value of assets left after deducting the paid up. value of preference shares is first apportioned to different categories of equity shares on the basis of paid up value of such categories. The amount thus arrived at would be divided by the number of shares in each of such categories to get the value of each share of such categories.

(3) If the preference shares are participating and rank equally with the equity shares, then the value per share would be in proportion to the paid up value of preference shares and equity shares.


Share ownership in a private company is usually quite difficult to value due to the absence of a public market for the shares. Unlike public companies that have the price per share widely available, shareholders of private companies have to use a variety of methods to determine the approximate value of their shares. Some common methods of valuation include comparing valuation ratios, discounted cash flow analysis (DCF), net tangible assetsinternal rate of return (IRR), and many others.

The most common method and easiest to implement is to compare valuation ratios for the private company versus ratios of a comparable public company. If you are able to find a company or group of companies of relatively the same size and similar business operations, then you can take the valuation multiples such as the price/earnings ratio and apply it to the private company.

For example, say your private company makes widgets and a similar-sized public company also makes widgets. Being a public company, you have access to that company's financial statements and valuation ratios. If the public company has a P/E ratio of 15, this means investors are willing to pay $15 for every $1 of the company's earnings per share.  

In this simplistic example, you may find it reasonable to apply that ratio to your own company. If your company had earnings of $2/share, you would multiply it by 15 and would get a share price of $30/share. If you own 10,000 shares, your equity stake would be worth approximately $300,000. 

You can do this for many types of ratios: book valuerevenueoperating income, etc. Some methods use several types of ratios to calculate per-share values and an average of all the values would be taken to approximate equity value.

DCF analysis is also a popular method for equity valuation. This method utilizes the financial properties of the time-value of money by forecasting future free cash flow and discounting each cash flow by a certain discount rate to calculate its present value. This is more complex than a comparative analysis and its implementation requires many more assumptions and "educated guesses." Specifically, you have to forecast the future operating cash flows, the future capital expenditures, future growth rates and an appropriate discount rate. (Learn more about DCF in our Introduction to DCF Analysis.)

Valuation of private shares is often a common occurrence to settle shareholder disputes, when shareholders are seeking to exit the business, for inheritance and many other reasons. There are numerous businesses that specialize in equity valuations for private business and are frequently used for a professional opinion regarding the equity value in order to resolve the issues listed.



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