Real Value of stocks - HELP!!!

adilsaleem · #1 16th August 2007, 07:29 PM

Hi Memebers
I need some help on valuation of companies in INDIA. I was going through an article and i saw that the earnings per share for RNRL is 10 paisa for the previous quater. Since then the stock price of RNRL has moved up by more than Rs 7 which is 70 times the earnings per share. If RNRL plans to close down would every investor get back Rs 46 (its current value) as of today ? Im sure the answer to this is NO. But my question is a little deeper. To my mind we would not get back even Rs 10 then how can the company stock be valued at Rs 47 and people also expect it to go up to 200 plus when it took them 1 quater to make 10 paisa per share. This is more of a general question RNRL is just an example.

Consider a Software company XYZ. It has a cash reserve of 30 million. Its got two business that have been giving it profit of Rs. 20 million each per year. Considering that it would improve by say 25% in the coming year we could think of a valuation of Rs 30 million + Rs 40 million + 25% (40 million) = 80 million. How do people end up having market caps of 500 million for such companies ?

The US subprime mortgage meltdown has shaved off Rs 2,40,000 crore market capitalisation on the Bombay Stock Exchange in fourteen sessions.
Does that mean that just 14 sessions back our companies were worth 240 thousand crore more than today ?

Someone please help me learn how to calculate the valuation of a company?

- Adil Saleem

ps: i have no holdings as of now and waiting for a good technical movement for entry.

adilsaleem · #2 17th August 2007, 12:08 PM

Someone please help me on this ... i have been waiting for a response.

raosrinivas · #3 17th August 2007, 12:22 PM

Quote:

Originally Posted by adilsaleem

Hi Memebers
I need some help on valuation of companies in INDIA. I was going through an article and i saw that the earnings per share for RNRL is 10 paisa for the previous quater. Since then the stock price of RNRL has moved up by more than Rs 7 which is 70 times the earnings per share. If RNRL plans to close down would every investor get back Rs 46 (its current value) as of today ? Im sure the answer to this is NO. But my question is a little deeper. To my mind we would not get back even Rs 10 then how can the company stock be valued at Rs 47 and people also expect it to go up to 200 plus when it took them 1 quater to make 10 paisa per share. This is more of a general question RNRL is just an example.

Consider a Software company XYZ. It has a cash reserve of 30 million. Its got two business that have been giving it profit of Rs. 20 million each per year. Considering that it would improve by say 25% in the coming year we could think of a valuation of Rs 30 million + Rs 40 million + 25% (40 million) = 80 million. How do people end up having market caps of 500 million for such companies ?

The US subprime mortgage meltdown has shaved off Rs 2,40,000 crore market capitalisation on the Bombay Stock Exchange in fourteen sessions.
Does that mean that just 14 sessions back our companies were worth 240 thousand crore more than today ?

Someone please help me learn how to calculate the valuation of a company?

- Adil Saleem

ps: i have no holdings as of now and waiting for a good technical movement for entry.

Adil,

Stock price has nothing to do with the what the company is worth today, stock prices are forward looking, which means they are priced based on the company's future prospects, future growth , future earnings potential. there is a value called the book value, which is basically total assets - total liabilities, which is what a share holder will get if the company is closed down today and the proceeds distributed to the share holders, this value if you watch it is almost same every day only changes after the quarterly results to reflect the correct position. a company with a book value of 3 can be trading at 300 today, which means investors have a lot of confidence in the stock and they expect the stock to grow a lot in future. the next day if it drops to 30 it means investors are perceiving some risks that might hamper the future growth/earning potential of the company. if it goes to 2 the next day, investors are thinking that the company will lose money in future "if the company is not growing, it is losing money".

so do not confuse book value to stock price.

maxmak · #4 17th August 2007, 12:27 PM

Hawa ka koi mol nahi hota,
Investors ko nafe ka bhhoot Lag jaye,
Hawa ka koi Dam nahi hota....

karthickdoss · #5 17th August 2007, 12:33 PM

Isn't insane to value the stock this high when it is really worth much lesser?
If "future" this, "future" that is to be considered, are we considering the profit that the company will earn in next 100 years.. ?
If the company is valued very close to its book value (ie. book value + earning for the next year or two) , we will not be seeing this much volatility or wiping off of hard earned money in shock like we are seeing for past couple of weeks.
Does it not make sense if SEBI puts a cap on the stock prices just like MRP on the products to save the shirts of millions?
Just thinking aloud.

-Karthick
PS: I don't have any positions right now and its been 6 months since i stopped trading.

raosrinivas · #6 17th August 2007, 12:54 PM

Quote:

Originally Posted by karthickdoss

Isn't insane to value the stock this high when it is really worth much lesser?
If "future" this, "future" that is to be considered, are we considering the profit that the company will earn in next 100 years.. ?
If the company is valued very close to its book value (ie. book value + earning for the next year or two) , we will not be seeing this much volatility or wiping off of hard earned money in shock like we are seeing for past couple of weeks.
Does it not make sense if SEBI puts a cap on the stock prices just like MRP on the products to save the shirts of millions?
Just thinking aloud.

-Karthick
PS: I don't have any positions right now and its been 6 months since i stopped trading.

Regd the future, it means different for different people some one might invest thinking the company's earnings will double in 2 years, someone might have 5 years time frame, and other might have longer time frames, others will buy it today thinking someone will buy his share tomorrow morning,

what is really important here is demand /supply, if every one wants to buy one stock and if the sellers are less than the buyers then the stock prices increases and vice-versa, no-one has come up with any formula and no-one will ever come up with a formula to calculate "exact" price of stock ,

think about a drug company with a price/earnings ratio of 15 trading today, tomorrow if it announces that they came up with a drug for some major disease, the price of the stock may increase 100- 1000 times tomorrow morning, can you still say after that that P/E of 1500 is too much, because earnings have not changed between yesterday and today, or instead going to buy the company shares because it has the potential ?

think for yourself

adilsaleem · #7 17th August 2007, 03:07 PM

Good point. I do understand valuation of a company forecasting some good profits but i dont understand going overboard. Take for example BHEL lost 37000 crores of market cap just in 1 day (yesterday). I dont think they can earn that much in the next ten years.

raosrinivas · #8 17th August 2007, 03:38 PM

Quote:

Originally Posted by adilsaleem

Good point. I do understand valuation of a company forecasting some good profits but i dont understand going overboard. Take for example BHEL lost 37000 crores of market cap just in 1 day (yesterday). I dont think they can earn that much in the next ten years.

if there were no discrepancy , all stocks would move about 7% a year, then there would not be any traders in a stock, to take advantage of the discrepancy

adilsaleem · #9 17th August 2007, 04:38 PM

Now is the important point:
Since there is no appropriate valuation as per the stock market it will not make a difference if the stocks fall down to half their current value. Even then most of the stocks in the sensex and the nifty would be valued more than their current book value.

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