05/07/2020
Understanding valuations
P/Es P/Bs and what not do the TV guys speaks…
Tune into money control or ET now, some odd fundamental analyst speaks on the prospects of a company. And the viewer get somehow convinced that the company has a hidden ‘kuber ka khazana’ which will reveal itself in a few days. A penny stock will become a multi-bagger… a small IT company which operates from a small office somewhere on the outskirts of Pune will become a Infosys or a TCS or may be a Microsoft.
But tragedy strikes when the odd Suzlon stock does not quite recover. The investor’s dreams are broken and what does the analyst say…. I gave you a stop loss and then he quickly diverts attention to some stock which he thinks also has a khazana…
It’s always better to know what fundamentals are than relying on an analyst. For proof, if an analyst was so equipped why the hell would he waste time sitting on some channel… and something even selling his subscription packages… especially the jackpots and bumpers…
Understand this… what is book value…
What is your book value as an individual… simple assets minus loans…?
Let’s say a person has 15, 00,000 rupees as asset. That includes include everything… all the money in banks… the ULIPS, house car and everything that be sold. And then he has an outstanding loan of 10, 00,000. The book value is then 5, 00,000… the net positive amount.
So next time you want to understand the real value of a company…have a look at the book value.
Now… we need to understand if the stock price is cheap or expensive compared to the company’s value.
For that, we need to know what a market capitalization is…
That is a simple term…. Share price multiplied by no of shares. So basically, it’s how the stock market is valuing the stock…
Now there is a term P/B or rather price to book value. It is simple ratio between the prices of the stock to book value. Here a book value can be considered at a stock level where the real value of the company is divided by the number of stocks in the market. So, a P/B is ratio between prices of stock to the book value of the stock. A low P/B would mean cheap valuation while a high P/B would mean high valuation.
