Valuation of Shares

What Is Valuation of Shares?

Valuation of shares refers to the process of determining the fair value or worth of a company’s shares. It helps investors, companies, and financial analysts understand what a share should ideally be priced at based on the company’s performance, financial health, growth potential, and market conditions.

Whether you are investing in stocks, selling shares, issuing new equity, or evaluating a business for mergers and acquisitions, valuation of shares plays an essential role in making informed decisions.

Why Valuation of Shares Matters?

The price of a share in the market may not always reflect its true value. Markets can react to sentiment, news, or speculation. This is why investors look beyond market price and assess the intrinsic value of shares.

Key reasons valuation of shares is important:

• Helps determine whether a stock is overvalued or undervalued
• Supports investment decisions based on long-term fundamentals
• Allows companies to raise capital at a fair value
• Useful in mergers, acquisitions, and restructuring
• Helps in compliance and taxation for private or unlisted companies

In short, share valuation allows stakeholders to make rational and strategic financial decisions.

Common Methods Used in Valuation of Shares

Different approaches are used depending on the purpose and type of company being valued.

1. Market Value Method

Used for publicly traded companies. The share price on the stock exchange reflects the company’s perceived value.

2. Net Asset Value (NAV) Method

NAV = (Total Assets - Total Liabilities) / Number of Shares

Often used for asset-heavy or unlisted companies.

3. Discounted Cash Flow (DCF) Method

Future cash flows are projected and discounted to today’s value. This method focuses on business growth potential.

4. Earnings Multiple or PE Ratio Method

Value is calculated based on the company’s earnings and comparable market valuations.

Example:

If a company earns ₹20 per share and the industry PE ratio is 18, then:

Value per share = 20 × 18 = ₹360

Real-World Example

Consider two companies with similar revenue.

Company A is debt-free and consistently profitable.

Company B has high debt and unstable earnings.

Even if their market prices look similar, Company A will likely have a higher intrinsic value due to financial stability and growth prospects. This difference is captured through the valuation of shares.

Key Takeaway

Valuation of shares helps uncover the true financial worth of a company. It allows investors to avoid buying overpriced stocks and helps business leaders make fair and strategic financial decisions. Valuation is not about predicting the market. It is about understanding value based on facts and fundamentals.

FAQs

Is valuation of shares only for listed companies?

No. It is also widely used for private and unlisted companies, especially during fundraising, mergers, and internal restructuring.

Which valuation method is the most accurate?

There is no single best method. Analysts often use multiple methods together to triangulate a reliable value.

Why does share price sometimes differ from valuation?

Market price reflects supply, demand, sentiment, and speculation. Valuation reflects fundamentals and long-term value.