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	the growth rate of the dividends	%

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 assets, internal 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 value, revenue, operating 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.

Fundamental Analysis - Criticisms And Valuation

FUNDAMENTALS: QUANTITATIVE AND QUALITATIVE 

You could define fundamental analysis as "researching the fundamentals", but that doesn't tell you a whole lot unless you know what fundamentals are. As we mentioned in the introduction, the big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. Obvious items include things like revenue and profit, but fundamentals also include everything from a company's market share to the quality of its management. 

The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn't all that different from their regular definitions. Here is how the MSN Encarta dictionary defines the terms: 

• Quantitative – capable of being measured or expressed in numerical terms.
• Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

In our context, quantitative fundamentals are numeric, measurable characteristics about a business. It's easy to see how the biggest source of quantitative data is the financial statements. You can measure revenue, profit, assets and more with great precision. 

Turning to qualitative fundamentals, these are the less tangible factors surrounding a business - things such as the quality of a company's board members and key executives, its brand-name recognition, patents or proprietary technology. 

QUANTITATIVE MEETS QUALITATIVE 

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the Coca-Cola Company, for example. When examining its stock, an analyst might look at the stock's annual dividend payout, earnings per share, P/E ratio and many other quantitative factors. However, no analysis of Coca-Cola would be complete without taking into account its brand recognition. Anybody can start a company that sells sugar and water, but few companies on earth are recognized by billions of people. It's tough to put your finger on exactly what the Coke brand is worth, but you can be sure that it's an essential ingredient contributing to the company's ongoing success. 

THE CONCEPT OF INTRINSIC VALUE 

Before we get any further, we have to address the subject of intrinsic value. One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock's "real" value. After all, why would you be doing price analysis if the stock market were always correct? In financial jargon, this true value is known as the intrinsic value. 

For example, let's say that a company's stock was trading at $20. After doing extensive homework on the company, you determine that it really is worth $25. In other words, you determine the intrinsic value of the firm to be $25. This is clearly relevant because an investor wants to buy stocks that are trading at prices significantly below their estimated intrinsic value. 

This leads us to one of the second major assumptions of fundamental analysis: in the long run, the stock market will reflect the fundamentals. There is no point in buying a stock based on intrinsic value if the price never reflected that value. Nobody knows how long "the long run" really is. It could be days or years. 

This is what fundamental analysis is all about. By focusing on a particular business, an investor can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. If all goes well, the investment will pay off over time as the market catches up to the fundamentals. 

The big unknowns are: 

1)You don't know if your estimate of intrinsic value is correct; and 
2)You don't know how long it will take for the intrinsic value to be reflected in the marketplace. 

CRITICISMS OF FUNDAMENTAL ANALYSIS 

The biggest criticisms of fundamental analysis come primarily from two groups: proponents of technical analysis and believers of the "efficient market hypothesis". 

Technical analysis is the other major form of security analysis. We're not going to get into too much detail on the subject. (More information is available in our Introduction to Technical Analysis tutorial.)

Put simply, technical analysts base their investments (or, more precisely, their trades) solely on the price and volume movements of securities. Using charts and a number of other tools, they trade on momentum, not caring about the fundamentals. While it is possible to use both techniques in combination, one of the basic tenets of technical analysis is that the market discounts everything. Accordingly, all news about a company already is priced into a stock, and therefore a stock's price movements give more insight than the underlying fundamental factors of the business itself. 

Followers of the efficient market hypothesis, however, are usually in disagreement with both fundamental and technical analysts. The efficient market hypothesis contends that it is essentially impossible to produce market-beating returns in the long run, through either fundamental or technical analysis. The rationale for this argument is that, since the market efficiently prices all stocks on an ongoing basis, any opportunities for excess returns derived from fundamental (or technical) analysis would be almost immediately whittled away by the market's many participants, making it impossible for anyone to meaningfully outperform the market over the long term. 

Fundamental analysis seeks to determine the intrinsic value of a company's stock. But since qualitative factors, by definition, represent aspects of a company's business that are difficult or impossible to quantify, incorporating that kind of information into a pricing evaluation can be quite difficult. On the flip side, as we've demonstrated, you can't ignore the less tangible characteristics of a company. 

In this section we are going to highlight some of the company-specific qualitative factors that you should be aware of. 

BUSINESS MODEL 

Even before an investor looks at a company's financial statements or does any research, one of the most important questions that should be asked is: What exactly does the company do? This is referred to as a company's business model – it's how a company makes money. You can get a good overview of a company's business model by checking out its website or reading the first part of its10-K filing (Note: We'll get into more detail about the 10-K in the financial statements chapter. For now, just bear with us). 

Sometimes business models are easy to understand. Take McDonalds, for instance, which sells hamburgers, fries, soft drinks, salads and whatever other new special they are promoting at the time. It's a simple model, easy enough for anybody to understand. 

Other times, you'd be surprised how complicated it can get. Boston Chicken Inc. is a prime example of this. Back in the early '90s its stock was the darling of Wall Street. At one point the company's CEO bragged that they were the "first new fast-food restaurant to reach $1 billion in sales since 1969". The problem is, they didn't make money by selling chicken. Rather, they made their money from royalty fees and high-interest loans to franchisees. Boston Chicken was really nothing more than a big franchisor. On top of this, management was aggressive with how it recognized its revenue. As soon as it was revealed that all the franchisees were losing money, the house of cards collapsed and the company went bankrupt. 

At the very least, you should understand the business model of any company you invest in. The "Oracle of Omaha", Warren Buffett, rarely invests in tech stocks because most of the time he doesn't understand them. This is not to say the technology sector is bad, but it's not Buffett's area of expertise; he doesn't feel comfortable investing in this area. Similarly, unless you understand a company's business model, you don't know what the drivers are for future growth, and you leave yourself vulnerable to being blindsided like shareholders of Boston Chicken were. 

COMPETITIVE ADVANTAGE 

Another business consideration for investors is competitive advantage. A company's long-term success is driven largely by its ability to maintain a competitive advantage - and keep it. Powerful competitive advantages, such as Coca Cola's brand name and Microsoft's domination of the personal computer operating system, create a moat around a business allowing it to keep competitors at bay and enjoy growth and profits. When a company can achieve competitive advantage, its shareholders can be well rewarded for decades. 

Harvard Business School professor Michael Porter, distinguishes between strategic positioning and operational effectiveness. Operational effectiveness means a company is better than rivals at similar activities while competitive advantage means a company is performing better than rivals by doing different activities or performing similar activities in different ways. Investors should know that few companies are able to compete successfully for long if they are doing the same things as their competitors.  Professor Porter argues that, in general, sustainable competitive advantage gained by: A unique competitive position Clear tradeoffs and choices vis-à-vis competitors Activities tailored to the company\'s strategy A high degree of fit across activities (it is the activity system, not the parts, that ensure sustainability) A high degree of operational effectiveness

A BRIEF INTRODUCTION TO VALUATION  

While the concept behind discounted cash flow analysis is simple, its practical application can be a different matter. The premise of the discounted cash flow method is that the current value of a company is simply the present value of its future cash flows that are attributable to shareholders. Its calculation is as follows: 

For simplicity's sake, if we know that a company will generate $1 per share in cash flow for shareholders every year into the future; we can calculate what this type of cash flow is worth today. This value is then compared to the current value of the company to determine whether the company is a good investment, based on it being undervalued or overvalued. 

There are several different techniques within the discounted cash flow realm of valuation, essentially differing on what type of cash flow is used in the analysis. The dividend discount model focuses on the dividends the company pays to shareholders, while the cash flow model looks at the cash that can be paid to shareholders after all expenses, reinvestments and debt repayments have been made. But conceptually they are the same, as it is the present value of these streams that are taken into consideration. 

As we mentioned before, the difficulty lies in the implementation of the model as there are a considerable amount of estimates and assumptions that go into the model. As you can imagine, forecasting the revenue and expenses for a firm five or 10 years into the future can be considerably difficult. Nevertheless, DCF is a valuable tool used by both analysts and everyday investors to estimate a company's value. 

For more information and in-depth instructions, see the Discounted Cash Flow Analysis tutorial. 

RATIO VALUATION 

Financial ratios are mathematical calculations using figures mainly from the financial statements, and they are used to gain an idea of a company's valuation and financial performance. Some of the most well-known valuation ratios are price-to-earnings and price-to-book. Each valuation ratio uses different measures in its calculations. For example, price-to-book compares the price per share to the company's book value. 

The calculations produced by the valuation ratios are used to gain some understanding of the company's value. The ratios are compared on an absolute basis, in which there are threshold values. For example, in price-to-book, companies trading below '1' are considered undervalued. Valuation ratios are also compared to the historical values of the ratio for the company, along with comparisons to competitors and the overall market itself. 

CONCLUSION

Whenever you're thinking of investing in a company it is vital that you understand what it does, its market and the industry in which it operates. You should never blindly invest in a company. 

One of the most important areas for any investor to look at when researching a company is thefinancial statements. It is essential to understand the purpose of each part of these statements and how to interpret them. 

Fundamental Analysis - Resource Availability

ERP-01 Energy and Natural Resources 

Energy and natural resources are the life blood of manufacturing. Manufacturers need adequate, secure and affordable energy and raw materials to compete in the global marketplace. The NAM supports appropriate government policies, including the development of a national energy policy that would provide a climate conducive to exploration, development and efficient utilization of all domestic energy resources and would encourage development of public lands in a manner consistent with sound environmental management. Reducing America's dependence on non-domestic energy and natural resources is prudent and desirable. The NAM supports an “all-of-the-above” approach to energy, including recognition of the importance of energy efficiency to meeting future energy demands.

Manufacturers use a significant amount of the energy in this country and have long recognized the importance of energy efficiency to their operations. Providing additional energy to support a desired growth in manufacturing will require large capital investments by the private sector. The ability of the energy-producing and energy-consuming segments of industry to obtain adequate funding for energy-related investments must not be impaired by government policies. Government should not be in the business of picking winners and losers. The NAM will identify and oppose overly restrictive regulations and the implementation of policies that limit or eliminate energy sources and production.

The NAM supports significant investments to modernize the national utility grid and utilize smart metering, distributed storage and other advanced technologies to improve efficiency, affordability, reliability and security.

The NAM is committed to protecting the environment and to environmental sustainability. The NAM supports government policies that promote innovation and recognize that technological advances over time have reduced the environmental impacts of energy production and consumption. Moreover, the NAM encourages policies that recognize these technological advances, allow for a proper balance between economic growth and the protection of our environment, and take into account future challenges, including those posed by climate change.  

1.01. Oil and Natural Gas 

Our nation's domestic oil and natural gas supply represents an important factor in our energy future. In today’s global economy, U.S. manufacturers must be assured of an adequate supply of competitively priced oil and natural gas for industrial and commercial use, such as petrochemical feed-stocks, process gas uses and transportation fuels, and for power and steam generation. 

1.01a. Liquefied Natural Gas

The dramatic increase in the domestic natural gas resource base has reduced the likelihood of the need for significant Liquefied Natural Gas (LNG) imports. Some now believe the U.S. could eventually become a net exporter of natural gas. An adequate supply of natural gas is needed to meet the growing demand of the U.S. manufacturing sector in a recovering economy. The NAM strongly supports federal and state policies to accommodate growth in domestic natural gas production. We further believe abundant domestic natural gas resources can fuel a renaissance in U.S. manufacturing. The NAM fundamentally supports free trade and open markets. We support a natural gas policy process that is open, transparent and objective. 

1.01b. Production

Oil There are abundant oil and natural gas resources in the United States. Domestic demand for energy resources continues to increase. For manufacturers, a balance between supply and demand is important to assure competitive, stable prices. The NAM supports policies that promote the leasing, exploration and development of the nation's oil and natural gas resources in an environmentally sound manner. Exploration and development of promising areas onshore, offshore and in the Arctic can substantially lower our nation's energy vulnerability with minimal environmental impact. The emergence of hydraulic fracturing technologies has made the extraction of shale gas and shale oil more technically feasible and more cost-effective. The development of Canadian oil sand and shale gas resources is also providing increasingly important sources of energy for American manufacturers and consumers. These new sources of gas and oil will have a significant positive impact on this country’s ability to meet its feedstock and energy needs.

As is currently the case for states with onshore production from federal lands, and for Gulf Coast states with production from federal waters off their coasts, all states with federal offshore leasing and production should share in related federal revenues. 

1.01c. Refining Petroleum Products

The refining industry is one of America’s largest manufacturing sectors, and refined petroleum products play a critical role in meeting domestic transportation fuel demands. U.S. refineries process crude oil into products such as gasoline, distillate and jet fuels, heating oil and chemicals for domestic use and for export into world markets. U.S. refiners have responded to the call for a cleaner environment by producing cleaner fuels, such as reformulated gasoline, at competitive prices. Uninterrupted production of these products and the transportation infrastructure necessary to deliver them are essential to our national energy and economic security as well as to U.S. industry's ability to compete globally.

1.01d. Natural Gas and Manufacturing

Industry relies on natural gas for much of its energy needs and as a raw material. The NAM believes policies that encourage the cost-effective use of natural gas to grow American manufacturing should be encouraged.

The U.S. economy relies on natural gas for much of its energy needs and as a feedstock for commercial products. Natural gas is and will remain an important manufacturing commodity because of its scalability, affordability, versatility and efficiency. The NAM supports policies at the federal and state level that facilitate the responsible and expeditious development of natural gas resources, allowing these benefits to contribute to America’s economic recovery and to accrue for energy consumers.  

1.02. Coal

Coal is the most abundant energy resource in the United States and is a vital part of our efforts to meet our energy and transportation needs. The NAM believes increasing the utilization of advanced clean coal utility and industrial generation technology as well as expanding coal-to-gas and coal-to-liquid technologies in an environmentally sound manner is an appropriate and desirable national policy. Coal generates a significant percentage of our nation's electricity, and maintaining coal in a diverse national energy portfolio is in the national economic interest. Government actions that unreasonably increase the cost of production and use of coal for limited environmental or health benefits are counterproductive. Laws and regulations governing air, water and solid waste quality are currently the most crucial restraint on the use of coal by industry and utilities. Environmental policies should be reviewed and applied in a manner that balances reasonable environmental objectives with the need to have a diverse fuel portfolio, including continued cost-effective coal use. 

1.02a. Production from Federal Lands

The NAM supports policies that promote the leasing, exploration and development of the nation's coal resources in an environmentally sound manner. These are national resources on public lands, and they are vital to this country’s economic growth. The NAM opposes efforts to unnecessarily restrict access to these national resources. Coal leasing programs, which have historically been sporadic, have limited the potential mining of billions of tons of coal that lie beneath federal lands. A long-term, stable and flexible leasing policy should be maintained to ensure the availability of federal coal reserves to contribute to our nation's energy needs. The NAM therefore supports streamlining and expediting coal leasing under the Federal Coal Leasing Amendments Act.  

1.02b. Carbon Capture (CCS and CCUS)

The NAM supports continuing research, development and demonstration of carbon capture, beneficial use and storage (CCUS) technology. The NAM also supports expeditious research, development and demonstration of carbon capture use or storage (CCS) technology. (See ERP-02 1.13 for NAM climate change principles.)  

1.03. Alternative Energy Sources

A free market energy policy is the best way of encouraging economically sustainable alternative energy options. Government can play a positive role in support of the research and development of alternative energy sources. The NAM opposes federal government mandates for use of alternative energy sources. Policies that mandate the commercial use of non-traditional energy sources before they are economically competitive are inefficient and impose unnecessary costs on our society.  

1.03a. Clean, Renewable and Non-Traditional Energy Sources

The NAM supports policies that encourage an energy mix comprised of renewable energy resources and other power options and allows energy efficiency measures but does not support mandating specific technologies or portfolio standards. Clean and renewable energy resources such as wind, solar, geothermal, hydro, landfill gas, municipal solid waste (excluding paper which is commonly recycled) and sustainable biomass provide alternatives to traditional fossil fuels. Together these resources account for a steadily rising share of U.S. energy supply and development. The NAM encourages Congress to review clean and renewable energy resources to ensure that policies avoid potential adverse impacts on users of renewable feed stocks, agricultural and forest resources. These incentives should not create winners and losers in the quest for developing renewable fuels. In establishing federal renewable energy policies, the NAM encourages Congress to recognize regional differences in renewable energy resource availability, and to not conflict with or pre-empt state programs already enacted. Development and utilization of non-traditional fuels and technologies will enhance energy flexibility and expand diversification of energy supplies. 

1.04. Transmission

The NAM supports a transparent, streamlined and timely federal permitting process for interstate electric transmission infrastructure. Cost-effective investments in transmission infrastructure to improve the reliability, capacity, efficiency and security of the electric grid promote a competitive wholesale electricity market which benefits residential, commercial and industrial rate-payers.  

1.05. Demand-Side Management (DSM) Programs, Energy Effciency Measures and Distributed Generation Resources

The NAM believes that the provision of cost-effective DSM services by individual customers and aggregators’ programs, energy efficiency measures, and distributed generation resources can help ensure a reliable and adequate electricity supply at a lesser cost. Investments in and opportunities for technologies and measures that enable customers and aggregators to provide such services should not be precluded. The NAM also believes that electric and natural gas utilities should not be precluded from meeting future electricity and natural gas needs with these technologies and measures. Utilities also must not be precluded from recovering prudently incurred costs when implementing these programs, measures and services, and non-discriminatory market opportunities for DSM services. 

1.06. Hydroelectric Power

Hydropower is a renewable resource that cannot easily be replaced. It does not deplete the nation's other fuel resources and contributes to U.S. energy self-sufficiency. Although hydro contributes a relatively small percentage of the nation's energy supply, it is a significant percentage of the renewable energy supply. It is energy efficient, with energy conversion efficiency in the range of 85-95 percent. The NAM supports the continued use and development of hydropower resources.

The NAM supports the streamlining of the regulatory process for hydroelectric power development through the elimination of redundant or contradictory regulatory steps and avoiding the imposition of conflicting clauses in other legislative initiatives such as those related to clean air, clean water and endangered species.

With regard to hydro projects owned and operated by the federal government itself, efforts to offset their impact on fish and wildlife (including Endangered Species Act initiatives) must be carefully balanced with the preservation of economic, recreational and public safety goals.  

1.07. Nuclear Energy

Nuclear power is a safe and vital source of cost-effective base-load electricity that does not emit criteria pollutants or greenhouse gases into the atmosphere. It is the largest source of non-emitting power generation in the United States and the second largest source of electricity, supplying approximately 20 percent of the nation's power. The NAM supports the continued development and operation of nuclear energy consistent with the protection of public health and safety.

Nuclear energy helps stabilize the price of electricity while maintaining a diversity of domestic fuel sources. As the demand for electricity in the U.S. continues to grow, the NAM supports the construction of additional nuclear power plants that have been approved by the Nuclear Regulatory Commission to maintain a diverse portfolio of generating resources. The NAM also supports advanced nuclear technology for use in manufacturing as a source of carbon-free process heat.

In supporting the continued use and development of nuclear energy in the United States, the NAM supports the construction and operation of facilities covering all parts of the fuel cycle and nuclear energy generation, including power plants, fuel enrichment facilities, fuel fabrication plants, low-level and high-level waste handling and disposal operations, and other related facilities critical to supporting and expanding the nuclear energy industry.

The NAM supports policies that allow the federal government to fulfill its legal obligation to remove used fuel from commercial nuclear power plants and manage its long term disposal. We support the research, development and demonstration of technologies to close the fuel cycle while a permanent disposal facility, which is needed even if the fuel cycle is successfully closed, is developed. The NAM encourages the development of interim storage facilities for consolidating used fuel until recycling or permanent disposal facilities, or both, are available.  

1.08. Energy Efficiency

Manufacturers are committed to reducing our energy intensity and producing more energy efficient consumer products to help reduce the U.S. demand for energy, save money, lower costs and lessen greenhouse gas emissions. American society has much to gain from sensible efficiency and waste reduction measures across all sectors of the economy. 

1.08.a Industrial Energy Effciency

Manufacturers use one-third of our nation’s energy and are directly affected by the cost of energy in making products as well as by the cost of maintaining office operations. It is widely acknowledged that process and building system energy efficiency and conservation offer immediate and cost-effective opportunities to reduce energy cost inputs, reduce water use, stretch available energy supplies and decrease greenhouse gas emissions.

Manufacturers have taken the lead in making energy efficiency a priority. Improvements in energy efficiency in the manufacturing sector have helped the country to be more efficient in energy use per unit of GDP and reduced the energy intensity of the U.S. economy. Manufacturers have achieved greater energy efficiency through cost-effective distributed generation, combined heat and power technologies, waste heat recovery systems, water reuse and recycling, intelligent energy systems such as advanced metering infrastructure and demand response, and improved process manufacturing.

The most significant federal actions to increase industrial energy efficiency in the long run are those that will create a positive climate for capital investment and energy services investment for new and existing plants and equipment.

The NAM supports the use of favorable capital cost recovery tax policies including first year expensing (see TDEP-01 1.02a) for capital investment.

There is an important federal role to be played in basic research and development of new high-risk energy efficiency and waste minimization technologies in energy intensive industries, particularly where private sector incentives maybe inadequate.

There is also a clear federal role for supporting and incentivizing small and medium businesses in the use of proven energy management technologies, practices and services.

The NAM believes that previous overly prescriptive federal energy policies have failed in large part because cost-effective industrial energy efficiency improvements cannot be mandated. Industrial energy management is a complex moving target that includes process innovation, long-term quality planning, energy assessments of building and equipment purchases, linkage of water and energy efforts, employee awareness, and waste minimization and recovery.

The NAM supports voluntary industry and market-driven benchmarking of industrial facilities and processes for the purposes of raising the level of awareness of best-in-class energy management possibilities. The NAM opposes the imposition of mandatory data collection programs unless there is a clear justification of the need for the data, as well as complete protection of proprietary data. The federal role should be limited to supporting industry in the development of voluntary information exchanges.

The NAM also opposes the imposition of mandatory industrial energy efficiency targets. Federal energy efficiency targets would have no meaning to most companies because manufacturing energy consumption varies dramatically from plant to plant. Product demand, weather, water availability, fuel price swings and capital investments, such as pollution control technology, influence manufacturing energy consumption.

The NAM supports federal programs that encourage and help manufacturers, especially small and medium-sized manufacturers, to understand and deploy energy efficiency and energy management measures for the purposes of becoming more competitive in a global marketplace. 

1.08.a High Performance Buildings

Manufacturers Manufacturers play a significant role in improving the efficiency of commercial and residential buildings. Since the building sector consumes approximately 40 percent of all energy used in the United States, the NAM supports market, regulatory and institutional reforms that increase opportunities to better utilize energy efficiency in buildings. Improving building efficiency should start in the federal government, which is the largest owner of building inventory in the country. The NAM supports policies to enhance private sector investment in public building efficiency improvement projects, as well as policies that strengthen standards for existing commercial, industrial and residential buildings.

In addition, since residential and commercial building improvements are often generated by obsolete infrastructure and involve large capital expenditures, the NAM supports providing favorable capital cost recovery tax policies, including first year expensing. (See TDEP-01 1.02a.)

Finally, the role of cooperative government-industry initiatives will be crucial in developing innovations that transform current construction and retrofit methods into an approach that fully integrates energy efficiency. As such, the NAM supports public-private efforts to engage the building industry and promote the development of a workforce that will shape the next generation of commercial and residential buildings. Hand-in-hand with this is the development of techniques to maintain efficiency through the lifespan of buildings, including energy audit systems and techniques and best practice-sharing of both. 

1.09. Climate Change

The NAM and our member companies are committed to protecting the environment through greater environmental sustainability, increased energy efficiency and conservation and reducing greenhouse gas emissions believed to be associated with global climate change. We know the U.S. cannot solve the climate change issue alone. The establishment of federal climate change policies to reduce greenhouse gas emissions, whether legislative or regulatory, must be done in a thoughtful, deliberative and transparent process that ensures a competitive level playing field for U.S. companies in the global marketplace.

Therefore, the NAM opposes any federal or state government actions regarding climate change that could adversely affect the international competitiveness of the U.S. marketplace economy. Any climate change policies should focus on cost-effective reductions, be implemented in concert with all major emitting nations, and take into account all greenhouse sources and sinks. The NAM believes that federal climate policies generally should pre-empt state policies.  

1.10. Natural Resources

U.S. manufacturers require access to natural resources, such as rare earth elements and other critical materials in order to produce products that are vital to the U.S. economy. Moreover, these resources are essential for the U.S. to remain competitive in the global manufacturing economy. Competition for raw materials should be market-based and not distorted by unwarranted or biased government action. The NAM supports government policies and actions that allow manufacturers access to these vital resources, support R&D, encourage the domestic mining and processing of such resources, and support unimpeded trade thereof. Additionally, the NAM supports reasonable reform of the Mining Law of 1872 that recognizes regulation of the mining industry under existing comprehensive environmental laws and compensates the federal treasury at royalty rates based on mineral values.

Fundamental Analysis - De-Mat Stocks

ARE ENTIRE STOCKS PRESENT IN DE-MAT FORM ?   

Now-a-days after the Internet Boom, stock Trading and all types of Transactions were performed only in Electronic form with the help of Fully Computerized Automated Software’s too, everything present in De-Mat form.

DEMATERIALISATION ! 

1. Can I dematerialize all my depository eligible securities through the same account?

Ans. Yes. You can choose to have all your securities deposited in a single account provided that the securities have the same holders.

2. Can I dematerialize shares, which are pledged with a bank, which is a DP as well?
Ans. Yes, you can, with the permission of the bank with whom such shares are pledged.

3. Can odd lot shares be dematerialized?
Ans. Yes, Odd lot share certificates can also be dematerialized.

4. How do I demat shares with Pre-Marital / Maiden names?
Ans. In such cases you need to submit a certified true copy of the marriage certificate along with the Demat Request Form (DRF), when you give your shares for dematerialization. Also provide an attested new specimen signature.

Fundamental Analysis - Mortgaging Of Stocks

PROMOTERS MORTGAGING OF STOCKS IF ANY ?   

Mostly promoters of mid-and small-cap companies pledge large quantity of shares to borrow money. So, the chances of default on margin calls and the consequent selling by the lenders is high, said an analyst. 

He added that investors should try and exit small-cap companies in such cases, as the counters are very risky and these events accelerate sharp movements in these stocks. 

Fundamentally, strong companies may not see any impact on share price but many in the real estate and telecommunication sectors have seen extreme movements due to promoters pledging shares and investors are advised to sell shares.

HOW MUCH HAS BEEN PLEDGED ?

If the promoter holding is high at the time of pledging shares, investors should not worry even if they pledge more number of shares.

"But, if promoters are pledging over 30 per cent, investors should try and find out the reason behind shares being pledged," advises Thunuguntla. The good part is that promoters are only mortgaging their holding, not selling it.

You should be even more alert when promoters with lower holding (less than 15-20 per cent) in the company pledge 10 per cent or more.

SEEK THE PURPOSE !

"Promoters raise money by pledging shares to fund growth plans that should not deter investors.

"Many companies pledge shares to apply for shares under their rights issue, at a price same as other shareholders. This should give confidence to investors, said Dedhia.

But this comes with a warning. Many promoters also pledge because they lost money due to bad business decisions or speculative tradings. The funds were raised to make up for it.

"It shows the liquidity condition of promoters is not very healthy and investors may want to exit such counters," said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities.

For retail investors, this bit of information is difficult to find.

If the company is pledging more shares with the financier because of the fall in share prices, there could be warning bells. Financiers keep the shares as collateral.

So, whenever the share price goes down, the promoter is either suppose to part pay the loan or pledge more shares. If the promoter cannot oblige, the lender can offload the shares in the market.