Value Investing :Calculate Valuation of a Company (Part-2)


Strategies to Calculate Valuation of a Company

Asset-Based Valuation

This method completely depends on the balance sheet. Firstly we calculate the Real assets value and the total liabilities of the company and subtract real assets value with total liabilities then we get the real value of the company.

Real assets value – Total liabilities = Real value

After calculating the real value compare it with a market capitalization of the company.

If the real value > market capitalization, then the company is undervalued.

If the real value < market capitalization, then the company is overvalued.

Important-: This method is only applicable to holding companies.

Holding companies– Those companies that do not have any operation (business), holding companies only invest in other companies and holding the stakes of other companies. Eg. Elcid Investments.

Case Study of Elcid Investments

The case study of Elcid Investments is very interesting. Elcid investments have a 2.95% stake of Asian paints and the value of a 2.95% stake is 4800 crores. But according to the balance sheet of the company, the company only has 294 crores non-current investments and 296 crores is the value of assets by the balance sheet.

Now,

Total asset – Non-current investments
296 crore – 294 crores = 2 crores
4800 crores are the actual value of non-current investments.
4800 crores + 2 crores = 4802 crores
Total assets – Total liabilities
4802 crores – 300 crores = 4502 crores
Asset-based valuation = 4502 crores

And if we talk about the market capitalization of the Elcid investments it is just 14 lakhs.

It means Elcid Investment is an undervalued company.
Share price = Rs. 6

According to the real assets value of the company, the share price of the Elcid Investments should be 1.5 – 2 lakhs.
So, In the case of Elcid Investment, shareholders know the worth of the company so they do not sell the share of the company, therefore this stock does not trade actively. New investors cannot able to buy the share of the company because the current investors are not selling the share of the company.

So, you can use asset-based valuation methods only on holding companies if you use this method on other companies then it will not work. Because the companies other than holding companies we analyze the valuation according to their profitability, future growth, and performance.

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