What is Share Valuation? Definition, Methods, Example

What is share valuation?

Any investor who wishes to outperform the market needs to become proficient in stock valuation. In essence, stock valuation is a process for figuring out a stock’s theoretical or intrinsic worth. 

The fact that a stock’s intrinsic value may differ from its present price highlights the significance of stock valuation. An investor can ascertain if a stock is overpriced or underpriced at its present market price by understanding the stock’s intrinsic worth.

It is essential to research a company’s valuation prior to making an investment. In today’s article, we will take a deeper look at the share valuation of a company with examples. 

Also read: 7 Top Investing Mistakes New Investors Should Avoid in Today’s Volatile Market

How to calculate the share value of a company?

Valuation of a share can often be determined by the difference between a company’s assets and liabilities. It might not always be a reliable metric. Consequently, when determining a company’s value, financial professionals select one of the following approaches. The following methods can be used to calculate a company’s valuation: 

Share valuation methods

When figuring out the fair value of a company’s stock, share valuation techniques are crucial. To determine a stock’s value, these techniques take into account variables including cash flows, dividends, profits, and assets. Typical techniques include:

Asset-Based Valuation: This approach deducts total liabilities from total assets to get the company’s net asset value. It works well for businesses with a lot of assets, such as manufacturing or real estate enterprises, where value is mostly determined by tangible assets.

Earnings-Based Valuation: Also referred to as earnings capitalisation, this method uses the company’s earnings to determine the value of a share. By dividing the company’s profits by a capitalisation rate, it determines the share value, which represents the needed return for the investor.

The Dividend Discount Model (DDM): This method estimates the current value of all future payments in order to determine a stock’s worth. It is perfect for firms that pay dividends since it makes the assumption that the value of the stock is equal to the total of all dividends that the company will pay throughout time, discounted to the current value.

P/E, or Price-to-Earnings Ratio: A company’s current share price and earnings per share (EPS) are compared using the P/E ratio. While a lower P/E can signal that the stock is cheap, a higher P/E indicates market confidence. It is frequently used to compare markets quickly.

Discounted Cash Flow (DCF) Analysis: Forecasting future cash flows and discounting them to their present value is how the discounted cash flow (DCF) analysis determines a company’s worth. 

Also read: Fundamental Analysis of stocks: Meaning, Importance, Pros & Cons

Example: Share value of Suzlon

To understand how much a Suzlon share is worth, we need to look at several key aspects of the company and its performance. 

• For example, understanding Suzlon’s business. Suzlon is India’s leading wind turbine manufacturer that makes and installs wind turbines, helping create renewable energy. This positioning is important because renewable energy is a growing sector, supported by government policies.

• The second step will be analysing the Basic share valuation method. The simplest way to value Suzlon’s shares is to look at its earnings per share (EPS). Let’s say Suzlon earns ₹0.71 per share. In the renewable energy industry, companies typically trade at 60.4 times their earnings (this is called the P/E ratio). Therefore, a basic calculation would value Suzlon’s shares at ₹42.884 (₹0.71 × 60.4).

• Another way to value Suzlon shares is to look at its assets. The company owns factories, equipment, and technology.

• Last but not least, as an investor you also have to take practical factors into account that are affecting the share price along with the future potential growth of the company. Real-world factors also affect Suzlon’s share value. These may include: rising demand for clean energy, government support for renewable energy, competition from other companies, raw material costs, the company’s debt levels, and overall stock market conditions.

In this way, investors can also calculate the same for other stocks. For example, the share value of Tata Motors, share value of Tata Steel, or the share value of Yes Bank. 

However, it’s important to remember that stock prices change daily based on market sentiment and news. It is possible that the market price of a stock to be different from the calculated share value.

Also read: 5 Best Trading Apps in India: Features, Pros, and Cons

Conclusion 

In your investing journey, it is essential to consider the valuation of a company to analyse if it is overvalued or undervalued.