When is the Need for Valuation of Shares?

Valuation of stock or a valuation of shares enables you to determine the fair value of the stock or shares of a particular company. Periodic valuation of shares and valuation in a few situations is necessary from multiple viewpoints such as security, sale, and purchase of shares, etc. This article from Valuation India, the leading valuation company in India, talks about a few aspects, including the circumstances that denote the need for share valuation.

What is the meaning of the valuation of shares?

As the name suggests, share evaluation refers to the process of knowing the value of the share of a particular company. Experts use a few quantitative techniques to evaluate shares. The share price of listed companies is easily available. However, to determine the value of shares that aren’t traded publicly, valuation is required.

What are the different methods of share valuation?

There are three types of share valuation techniques – asset-based and income-based. Let us glance through both.

1. Asset-Based Approach

The approach is based on the value of the company’s assets and liabilities, including contingent liabilities and intangible assets. Such an approach proves useful for distributors and manufacturers, wherein a massive volume of capital assets are used. The method involves using a specific formula, the technicalities of which can be understood through stock valuation experts. The approach involves considering points that include

  • Fixed assets considered at their realizable value
  • Current assets and liabilities that include payables, receivables, and provisions
  • Unrecorded assets and liabilities
  • Goodwill valuation as a part of intangible assets
  • Elimination of fictitious assets such as primary expenses, accumulated loss, discount on issue of shares and debentures

2. Income-Based Approach

The income-based approach helps valuate a smaller number of shares. It focuses on the returns a particular business is projected to yield. A common method applied is the projection of a business’s value by dividing its forecasted earnings by a capitalization rate. Some steps to compute the value per share as per the income-based approach are

  • Obtain the profit of a company
  • Obtain the capitalized value data
  • Determine the value of the share (capitalized value/number of shares)

3. Market-Based Approach

Usually, the market-based approach uses the share prices of comparable public traded companies and the asset or stock sales of comparable private enterprises. Data related to public traded companies is publicly available. However, that of the private companies can be taken from proprietary databases.

While choosing the comparable companies, some of the significant factors to consider are the volume and nature of business, the financial condition of the comparable enterprises, industry, size.

When Should Shares be Valuated?

Valuation of share proves a necessity in the following cases,

  • When a business is up for sale, and the owners want to know the value of their business
  • When the company wants to convert its shares – from preference to equity
  • When shares are held by an investment company
  • While implementing an ESOP
  • While compensating the shareholders
  • In the case of reconstruction, acquisition, mergers, amalgamations, etc.
  • While assessing tax under the wealth tax or gift tax acts
  • In the case of litigations, when the need for valuation of shares becomes a legal requirement

Valuation India – Your Trustworthy Partner for Valuation of Stocks

Valuation India is one of the top firms for the valuation of shares. The firm does the valuation of preference shares, valuation of goodwill and shares, valuation of private company shares. Partner with Valuation India if you want to evaluate the shares of your company or want to know the value of the shares of a particular company.

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