Equity Valuation

It is a method by which companies stock value are determined theoretically. In this method the intangible and tangible asset are taken into consideration. It is used to estimate the fair value of the shares of the companies. It takes into account sever financial indicators. It gives a detailed view of the companies fair share value to the investors, creditors and shareholders. Equity valuation is mainly done to predict the future price of the stocks. The investors use this method to find out the future price of the stocks using some parameters and there by gain from the price movement. There are three possibilities in which the equity can be priced they are,

• Undervalued is when the price estimated by the evaluation process is more than the market price of the stock. It is usually suitable for the investor to buy such stocks that are trading in an undervalued price.
• At par or fair valued is when the price estimated by the evaluation process is almost or equivalent to the market price of the stock. In this condition the investor can either wait for the stock to come down for purchase or else can sell the stock if he holds any.
• Over valued is a when the price estimated by the evaluation process is less than the market price of the stock. It is usually highly desirable to sell the stock at this condition so that maximum profit can be yielded.

Equity valuation is generally carried out using fundamental analysis of the company. Some of the fundamental methods used to calculate equity values are,

• EPS method is nothing but the total income of the company divided by the total number of share outstanding.
• Price to earning (P/E) is a ratio of the price of the share to the earning made by the company. It can also be termed as the inverse of the EPS. i.e. 1/EPS= P/E
• Return on Asset is nothing but the percentage of the asset that the company earns as profit.
• Market capitalization is the product of no of outstanding shares and market price of the share.  

The investors use the equity valuation technique to make investment decision especially when they are more interested in capital appreciation based profits.

Question

• What are the three possibilities of share price trading with respect to equity evaluation?
• Write some of the fundamental method used to find the equity value?