Saturday, May 23, 2015

Stocks that trade at a discount on their book values are bargains (undervalued) or not ?

Please suggest for buying share, we should consider 'Book Value'. It should be less than CMP or not. There is no any chapter in book about book value except for calculation in fundamental TP. Please suggest is it necessary to see individual book value of share except TP calculation. Ask by Ashwani Kumar ( registration number 13145). 
 Respected Sir, 
1.Sorry for late reply because I am busy on my NISM-Series-XV: Research Analyst Certification Examination and happy to annouce that I am passed this exam with 67 % marks.
2.Book Value of a company is the net-worth of the company. To compute book value per share, net-worth of the company is divided by the number of outstanding shares. 
3. If we take it in simple terms, book value per share means the theoretical amount of money each share would get in case the company business was to wind up. 
4.I am not use book value as my research criteria because the realizable value of company assets may be different from book value and is never known with certainty. 
5. Some of analysts use price-to-book value ratio (P/BV) which find price relative to the value. 
6.The P/BV measures a company's current market price (CMP) vis a vis its book value. 
7. An important limitation of this number is that most assets on the books of the company are shown at their historical cost less depreciation and not their realizable/liquidation value. 
8.P/BV less than 1 indicates the company is trading below its book value, and hence the stock is deemed to be undervalued. 
9.However, it is pertinent to ask, ‘why is the market pricing the share at a price less than BV?’ Please note that there may be several reasons for a stock being available for less than its book value including the poor investments made by the firm in the past which need to be written down subsequently. 
10.Hence, all the companies with P/BV less than 1 may not be value buys. Investors should not rely only on PBV for their investment decisions and should understand that not all stocks that trade at a discount on their book values are bargains(undervalued)
11.PBV is not relevant for sectors such as the service industry where assets are limited, You always see that IT stocks have a low book value and banking stocks have higher book value.
12. So this is the reason that why I use Price to net sale per share ratio for more accurate identifying measure of value buy.
13. Read my earlier article about book value at this link
Download Free list of All Indian Companies book Value
13. One Humble Request:- If anyone buy my book and not review it on seller site (Amazon , Flipkart, Bookadda etc) then please take 5 minute for my service and review my book on seller sites ( Amazon Flipkart etc). 
Mahesh Kaushik

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