Security Valuation

1. Sri Ramakrishna College of Arts & Science
Coimbatore – 06.
Stock Valuation
M.VADIVEL
Assistant Professor
Department of B.Com PA
Sri Ramakrishna College of Arts & Science
Coimbatore.

2. Stock Valuation

3. Security Analysis
 The process of determining how much a
security is worth.
 Is the analysis of trade able financial
instruments called securities.
 Determining the correct value of a
security in the market place.

4. Absolute Valuation:
This approach mainly focuses on finding
out the intrinsic value of a stock. Intrinsic
value of a stock is the true value of the stock
and this can be found by 2 methods namely,
dividend discount model and discounted cash
flow model.

5. Method

6. Two Methods:
• Dividend Discount model
• Discounted Cash Flow model

7. Discounted Cash Flow model
This model is based on a theory that suggests
that a stock is worth the sum of all its future
dividends.

8. Discounted Cash Flow model
By this model, we can calculate the current
value of the company based on future cash
flows.
Exp: Original Value = 70,000 ( Hero Splender +)
1.1.2005 = 70,000 (Original Value )
1.1.2006 = 60,000
1.1.2007 = 50,000
1.1.2008 = 40,000

9. Relative Valuation:
Using this model, you can compare certain
parameters of your stock with other similar
assets that would help in deriving the price of
the asset. This method includes several
techniques like Price Earnings (P/E),
Price/Earnings to Growth, Price/Book Value,
Price/Sales Value and Price/Cash Flow. Let us
learn in detail about these techniques.

10. a). Price Earnings (P/E):
Using this ratio, one can understand how much an investor is
willing to pay for each rupee of a company’s earnings. A stock with
higher P/E simply means that investors have higher expectations in
terms of earnings of the company. But one also has to remember that
a stock with high P/E is simply overvalued. On the other hand, a
stock with a low P/E ratio means the stock is undervalued. One can
understand whether a particular stock is undervalued or overvalued
by comparing it with other similar companies.

11. b). PEG ratio:
P/E
PEG = --------------
Earning growth rate
Earnings growth rate PEG ratio of 1 reflects a perfect
correlation between the company’s current market value and its
projected earnings growth. If this ratio is greater than 1, the stock is
considered to be overvalued and if the PEG is lesser than 1, it is
considered to be undervalued.

12. c). Price/Sales Value:
P/S = Price per share divided by Sales per
share Stocks that have a lower P/S value are
considered to be cheap than the stocks that
have a higher P/S.

13. d). Price/Book Value:
P/BV= Price per share/Book value per share
Book value reflects the net worth. If P/BV
ratio is less than 1, it means the investors feel
that the company’s assets are overvalued.
Whereas a high P/BV indicates that investors
believe that its assets are undervalued.

14. Valuation of stock in trade is very
important and any investor should have a clear
understanding of stock market valuation
methods that will help in taking the right
decisions about investing.

15. Thank You…….