Valuation of shares of companies means the theoretical calculation of the existing price of each share of the company. It is a financial calculation of the entire business based on the current position and future operations of the company. Valuation plays an important role in the transfer of shares and it is undertaken at the time of new investments, acquiring companies, divestment, and stake sale, etc.

For listed companies, the price of shares is influenced by market forces and is readily available since the last traded price itself is the market price. However, in some cases a separate valuation of shares is necessary.

In contrast, for closely held companies share valuation is an in-depth working and analysis for calculation of value of the business and shares.

Methods of Share Valuation

There are various methods available for valuation of shares. All methods are subject to use of estimates and hence involve a certain degree of professional judgement. Hence, the selection of method of valuation and the use of estimates is based on the practical situation and varies from company to company. The following are the most commonly used methods of share valuation in India

Net Assets Method

As the name suggests, under this method the Net Assets of a company are used as a measure of the value of a business and shares of the company. The realizable value of all fixed and current assets is reduced by the amount of loans and liabilities payable. The residual amount represents the 'Net Assets' of the business. Net assets means the funds available to the shareholders as owners of businesses.

Calculation of realistic value of fixed assets, realizable value of stock and debtors, etc., is the key to arrive at the accurate share value. Fixed assets that are specific to a company or industry may not have high realizable value even though value as per books may be high. Similarly, stock-in-process, raw materials, debtors, etc., need to be reconsidered based on actual realizable market value.

Discounted Cash Flow Method

This method of share valuation requires estimation of future cash flows of a business and discounting it to the value in present day terms. Terminal value of all future cash flows is to be added to discounted value of cash flows to obtain the value of the company. Deduction of loan funds from this provides the net value of the company.

The interest rate used for discounting factor and growth rate for the company are crucial in calculating the discounted cash flow. For the purpose of valuation under this method, the Weighted average cost of capital (WACC) is to be used as the discounting rate.

The discounted cash flow method of share valuation is considered to be very mechanical and rigid. Estimation of WACC also depends on professional judgement and approach by the person undertaking the valuation.

Our Services

Our experts provide share valuation service and choose the best fit depending on the type of company and purpose of valuation. We have assisted several companies, across sectors, stages, and complexities, to arrive at accurate share value for their company.

At V Purohit & Associates, we start with the underlying business goal you wish to achieve and offer you the most suitable share valuation service.

Talk to us

If you want to know more, or to get a share valuation for company in India, please feel free to contact us

We are a new-age financial accounting company, that upholds age-old values and principles of Chartered Accountancy. We offer a fairly-differentiated set of services, tailored to specific business goals and challenges.