Valuation of Unlisted Shares – Five different ways of valuing Unlisted Equities

Every investor wants to seek the most return on their investment. Value investors do their utmost to locate excellent companies at reasonable rates. There are a number of valuation models that may be used to calculate a stock's intrinsic value in order to evaluate if it is trading at an over-valued price or an or a cheap price. Everything is based on how much the stock is worth. Stock valuation is simple when the stock is listed on significant stock exchanges.

Since there is no market price accessible for unlisted equities, determining their fair value can be challenging. Everything pertaining to unlisted shares is based on either book values or assumptions. 

In this article, we will tell you of 5 methods that can be used for the valuation of unlisted shares in India.

How Are Unlisted Stocks Valued?

Since unlisted shares are not traded on a stock exchange and do not have a predetermined price, they are exchanged on the over-the-counter market. An unlisted company's share price can be determined in a number of ways because no one approach would be appropriate for valuing all shares. The following techniques are used to assess unlisted share prices.

1. Book Value Approach

   Book Value Approach, company's physical assets and liabilities are considered using this strategy. Verify that the company's assets and liabilities are fairly evaluated and revalued annually.

   All tangible assets - All tangible liabilities=Book Value.

   The liabilities and assets must be revalued annually, and the assets must have fair worth. You might have to compute a capitalization ratio for this method as well and use it. 

   The only intangible asset that can constitute an asset is goodwill; all other intangible assets cannot. Since goodwill cannot be produced by the company internally, it can be added.

2. Method of Last Transaction Price

   With this strategy, one attempts to calculate the value of unlisted shares based on the price at which the business last received money.

   Institutional investors are seen as wise, and as they are frequently among the first to invest in these companies and frequently have access to insider information, they give the market direction on how to value these businesses.

   The last price at which the unlisted share was traded is taken into account in this procedure, as the name implies. The price at which the prior trade occurred does not always have to be accurate for the current trade; the price of the shares can be overvalued or undervalued. This method is typically not used.

3. Discounted cash flow method or price to earnings ratio

   It is one of the most popular techniques, but it is only appropriate for businesses with solid business operations because existing earnings are taken into account when estimating future cash flow. Once that is predicted, you must apply a discount rate to these potential future cash flows. This rate can be calculated using the listed companies on the stock exchange in the same sector.

4. Value of Net Assets (NAV) Including Goodwill

   The main distinction between net asset value and book value is that net asset value is determined using the current price on the stock market, whereas book value relies on historical prices.

   NAV=Sum of all tangible assets with current market value - Sum of all tangible liabilities with current market value.

   The market price must be used to determine the worth of all assets and liabilities. The system takes most current appraisals within a year into account.

5. Value of Net Assets (NAV) Excluding Goodwill

   The sole distinction between this technique and the one before is that it does not include goodwill and intangible assets and liabilities, whereas the above method does.

   With this approach, the market value of the assets and liabilities is taken into account.

   NAV=Sum of all tangible & intangible assets with current market value - Sum of all tangible & intangible liabilities with current market value.

Final Thought

The Present Value Method, also known as the Discounted Cash Flow Method, and the Book Value Method are the two most used techniques for valuing a company's unlisted shares.

The other two are hardly ever utilised in comparison to these two. For the investor, the value of unlisted shares is quite important. However, the appraisal is highly challenging because the company's information and financial data are not readily available.

Therefore, if you plan to invest in unlisted stocks of any company, you need to gather all the information that is accessible and properly process it to get a better idea of the unlisted shares' fair market value.