by Analytical methods of share valuation are systematic techniques used to determine the estimated value of a company’s equity shares by examining its financial performance, assets, earnings, dividends, cash flows, and market position. These methods help investors, financial analysts, management, and shareholders make informed decisions regarding investment, share purchases, mergers, acquisitions, and corporate restructuring. Share valuation is important because the market price of a share may differ from its estimated intrinsic value due to market fluctuations, investor expectations, and economic conditions. Different valuation methods focus on different aspects of a company’s financial position and future prospects. The Net Asset Value Method considers the value of assets and liabilities, while earnings-based and dividend-based methods examine profitability and shareholder returns. Discounted Cash Flow and Comparable Company Analysis methods evaluate expected cash flows and market multiples. Selecting an appropriate method depends on the company’s nature, financial information, industry conditions, and purpose of valuation.
Analytical Methods of Share Valuation
1. Net Asset Value Method
The Net Asset Value (NAV) Method determines the value of equity shares by calculating the difference between the fair value of a company’s total assets and its total liabilities. The resulting net assets are divided by the number of outstanding equity shares to determine the value per share. This method is suitable for investment companies, property-owning businesses, and asset-intensive companies. However, it may not fully reflect the company’s future earning capacity, goodwill, or growth potential.
Formula: Net Asset Value per Share = (Fair Value of Total Assets − Total Liabilities) ÷ Number of Equity Shares
Example:
A company has total assets of ₹50,00,000, total liabilities of ₹20,00,000, and 30,000 outstanding equity shares.
Net Assets = ₹50,00,000 − ₹20,00,000 = ₹30,00,000
Net Asset Value per Share = ₹30,00,000 ÷ 30,000 = ₹100 per share.
Therefore, the estimated net asset value is ₹100 per share.
2. Earnings-Based Valuation Method
The Earnings-Based Valuation Method estimates the value of shares based on the company’s ability to generate maintainable profits. It assumes that investors are interested in the earnings a business can produce over time. Under this method, maintainable earnings are capitalised using an appropriate rate of return. This method is useful for profitable businesses with relatively stable earnings. However, its accuracy depends on the reliability of profit forecasts, the capitalisation rate, and the risks associated with the business.
Formula: Capitalised Value of Equity = Maintainable Earnings × 100 ÷ Capitalisation Rate
Value per Share = Capitalised Value of Equity ÷ Number of Equity Shares
Example:
A company earns maintainable annual profits of ₹6,00,000. The capitalisation rate is 12%, and there are 50,000 equity shares.
Capitalised Value = ₹6,00,000 × 100 ÷ 12 = ₹50,00,000
Value per Share = ₹50,00,000 ÷ 50,000 = ₹100 per share.
Therefore, the estimated value is ₹100 per share.
3. Dividend Discount Method
The Dividend Discount Method values equity shares by calculating the present value of future dividends expected by shareholders. It is based on the principle that the value of a share depends on the cash benefits investors expect to receive. This method is particularly suitable for established companies with stable dividend payments. Under the constant-growth model, dividends are assumed to grow at a constant rate indefinitely. However, this method may be less suitable for companies that do not pay dividends or whose dividend policies change frequently.
Formula: Share Value = Expected Dividend Next Year ÷ (Required Rate of Return − Dividend Growth Rate)
Example:
A company is expected to pay a dividend of ₹8 per share next year. The required rate of return is 12%, and the dividend growth rate is 4%.
Share Value = ₹8 ÷ (0.12 − 0.04)
Share Value = ₹8 ÷ 0.08 = ₹100 per share.
Therefore, the estimated share value is ₹100 per share.
4. Discounted Cash Flow Method
The Discounted Cash Flow (DCF) Method estimates share value by calculating the present value of expected future cash flows. It recognises that money received in the future is worth less than money received today because of the time value of money and investment risk. Analysts forecast future cash flows and discount them using an appropriate rate. This method is widely used in corporate valuation, mergers, acquisitions, and investment decisions. However, its reliability depends on accurate cash-flow forecasts, discount rates, and assumptions about future business performance.
Formula: Present Value = Expected Cash Flow ÷ (1 + Discount Rate)ⁿ
Example:
A company expects to generate ₹1,10,000 in cash flow available to equity shareholders after one year. The required rate of return is 10%.
Present Value = ₹1,10,000 ÷ (1 + 0.10)
Present Value = ₹1,10,000 ÷ 1.10 = ₹1,00,000.
If the company has 1,000 outstanding shares, the estimated value is ₹100 per share, assuming no other cash flows or claims.
5. Price-to-Earnings Ratio Method
The Price-to-Earnings (P/E) Ratio Method estimates the value of shares by applying an appropriate P/E multiple to the company’s earnings per share. The P/E ratio indicates how much investors are willing to pay for each rupee of earnings. Analysts may use the ratios of comparable companies, industry averages, or historical market data to select a suitable multiple. This method is simple and useful for comparing profitable companies. However, differences in growth prospects, business risks, and accounting practices may affect the reliability of the valuation.
Formula: Estimated Share Value = Earnings Per Share × Appropriate P/E Ratio
Example:
A company has earnings per share of ₹10. The appropriate P/E ratio is 15.
Estimated Share Value = ₹10 × 15 = ₹150 per share.
Therefore, the estimated share value is ₹150 per share.
6. Earnings Per Share Method
Earnings Per Share (EPS) measures the profit attributable to each ordinary share of a company. It is an important indicator of profitability and helps investors compare financial performance across different periods and businesses. EPS is calculated by subtracting preference dividends from profit after tax and dividing the remaining amount by the weighted average number of ordinary shares outstanding. Although EPS is useful for analysing profitability, it does not independently determine the fair value of a share. It is generally combined with a valuation multiple or another valuation method to estimate share price.
Formula: EPS = (Profit After Tax − Preference Dividends) ÷ Weighted Average Ordinary Shares
Example:
A company reports profit after tax of ₹12,00,000, preference dividends of ₹2,00,000, and 1,00,000 ordinary shares.
Earnings Available to Ordinary Shareholders = ₹12,00,000 − ₹2,00,000 = ₹10,00,000
EPS = ₹10,00,000 ÷ 1,00,000 = ₹10 per share.
If the appropriate P/E ratio is 12, the estimated share value is ₹10 × 12 = ₹120 per share.
7. Comparable Company Analysis Method
The Comparable Company Analysis Method estimates share value by comparing a company with similar publicly traded businesses. Analysts examine valuation multiples such as P/E, price-to-book, and enterprise value-to-EBITDA. The selected multiple is applied to the relevant financial measure of the company being valued. Adjustments may be necessary for differences in company size, profitability, growth, debt, and market position. This method is commonly used in investment analysis, mergers, and acquisitions. Its reliability depends on selecting genuinely comparable companies and using accurate financial information.
Formula: Estimated Share Value = Subject Company’s EPS × Comparable Company P/E Ratio
Example:
A company has earnings per share of ₹12. Similar listed companies have an average P/E ratio of 14.
Estimated Share Value = ₹12 × 14 = ₹168 per share.
Therefore, the estimated share value is ₹168 per share, assuming the comparable P/E ratio is appropriate.
8. Weighted Average Valuation Method
The Weighted Average Valuation Method combines the results of two or more valuation methods to determine an overall estimated share value. Different weights are assigned to each method according to its relevance, reliability, and suitability for the company. For example, an asset-based method may be more relevant for an asset-intensive business, while an earnings-based method may be more suitable for a profitable company. This approach helps reconcile different valuation estimates. However, the weights should be justified by the purpose of valuation and the reliability of the available information.
Formula: Weighted Average Value = Sum of (Value per Share × Weight) ÷ Total Weights
Example:
A company’s shares are valued using three methods:
Net Asset Value Method = ₹100 per share, with a weight of 2.
Earnings-Based Method = ₹140 per share, with a weight of 3.
Comparable Company Method = ₹160 per share, with a weight of 5.
Weighted Average Value = [(₹100 × 2) + (₹140 × 3) + (₹160 × 5)] ÷ (2 + 3 + 5)
Weighted Average Value = (₹200 + ₹420 + ₹800) ÷ 10
Weighted Average Value = ₹1,420 ÷ 10 = ₹142 per share.
Therefore, the estimated weighted average value is ₹142 per share.
