How to Value Stocks

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Rishi Kashyap
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How to Value Stocks


For an investor it is a big challenge how to value stocks ?
While Financial statement analysis does tell a lot about the company, it is the Financial ratios of the company which help you in selecting and rejecting the shares in a company !

In this Chapter of our Stock Market Course we will learn the following

  1. Various methods to value Stocks
  2. Putting price tags to the Company
  3. 8 important financial ratios to reject the shares

Why I explain rejection of Shares in valuing stocks ?
I think you too will agree, that, Stock tips is a common thing these days !
Social Media, Whatsapp groups, TV anchors, Financial advisors, your banks relationship manager, your father, your son, your brother, your friend, your barber, your driver, your dog all are suggesting you best stocks to buy today !
Ok, may be not your dog, but my point is, you get flooded with Share recommendations everyday !
There are more than 1700 and more than 4000 actively traded companies in stock exchange NSE and BSE respectively.

With so many shares to monitor and judge, you need to know how to reject Share recommendations within 2 minutes noodle cooking time !
Once you have rejected many shares, few numbers, which remain, needs to be examined better, monitored through Stock Watch list or invested and added to stock portfolio, depending upon your call !

1) DISCOUNTED CASH FLOW (DCF) - In very simple terms you make an estimate of companies Future Cash flow expectations. Once you have that number you discount that to present cash expectations at an estimated rate expected to get the value of the company.
It is OK if it did not made any sense to you !
I too did not understand it !
I wasted 2 years understanding and reading investment books on this only to realize that there are too many "expectations" and "estimates" in it ! In the end, I decided to ignore it !
If you are still interested to understand DCF, please read in details at Wikipedia DCF, for me, I started following
We never sit down, run the numbers out and discount them back to net present value. The decision should be obvious.Mr Charlie Munger
Now that DCF is done lets talk about 2 easier methods to value stocks !
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Max stock value by both method may be close or far apart. I take a more conservative approach and take the minimum of the 2 method for assigning an approximate value to the stock.
My Stock A valuation will be max 16 Rs with range 8-16 Rs
My Stock B valuation will be max 1100 Rs with range 800-1100 Rs
How to value stocks
Putting a price tag to a company makes it easy to categorize them as

A point to note here is that Valuation of stock is an approximation and is not exact. In, fact in both methods we got a range within which you estimate the Stock Value !
There is no such thing as precise intrinsic valueMohnish Pabrai

Basic valuation of stock is just the start of Fundamental analysis of a company.
While this categorization helps is stock picking decision, valuation done ignoring other important financial ratios can be risky for Investment returns.

The problem with financial ratios is that there are just too many of them to confuse you, so let us start with minimum and we will slowly add more ratios in our filter !
From 2008 to 2012 I was using only these 8 financial ratios and basic numbers and had an accuracy of 40-45% in stock picking. While there is nothing to boast off with such performance, however, I did prevent myself from any serious losses and realized that I was easily able to judge reject TV and Social media anchor recommendations !
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Rules are for the obedience of fools and the guidance of wise menMr Douglas Bader
Remember do not follow any rules blindly ! As we progress in this stock market course, we will not only understand, but also break many of our set rules !

With this new learning, let us modify our
Thumb Rules for Stock Investment
  1. Default mode is DO NOT INVEST
  2. Verify Financial statement source of Information. Best is to do financial statement analysis personally.
  3. If you do not understand the financial statement, safely switch to default mode, DO NOT INVEST. Period !
  4. Check Financial ratios for fundamental analysis, if not sure, switch to default mode, DO NOT INVEST.
  5. Cannot value a stock, switch to default mode,  DO NOT INVEST.
Your success in stock market is dependent not only on how correctly you do the fundamental analysis or how you find undervalued stocks, it also depends upon the Stock Markets probability of earning !


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