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

In this article, we will talk about Valuation of Unlisted Shares and five different ways of valuing unlisted equities.

In the stock market, valuation is one of the most important concepts. Everything depends on the valuation of the stock.

However, when the stock is listed in major stock exchanges, it becomes easy to value the stock.

With unlisted stocks, it is difficult to find the fair value as there is no market price available.

Everything related to the unlisted shares is either dependent on the assumptions or book values.

Furthermore, you need to change the valuation immediately if there are some material changes in the company.

For instance, if the company’s credit rating goes down, or customers or clients file legal suits against the company.

Even if the company makes a breakthrough invention, anything of a similar sort.

Valuation of Unlisted Shares – 5 Methods

Here are the list of 5 methods used for valuation of unlisted stocks in India.

1. Recent Transaction Price Method
2. Book Value Method
3. Present Value Method or Price to Earnings Ratio
4. Net Asset Value – Including Goodwill and Identified Intangibles
5. Net Asset Value – Excluding Goodwill and Identified Intangibles

These are 5 methods which a company used to value their unlisted shares in the unlisted stock market.

Lets have a detailed understanding of these 5 methods below.

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Recent Transaction Price Method – Valuation of Unlisted Shares

As the name says it is a method where the last price at which the unlisted stock was traded can be used. However, in this method, both the parties involved need to be independent.

This means that there is no pressure of buying or selling the shares on them. Both must be acting for their self-interests.

Investors use this method rarely. This is because the transactions happen in the unlisted stock market very infrequently.

Book Value Method – Unlisted Stocks Valuation Technique

The second method we have is about the book values of the companies’ assets and liabilities.

You can use the method if the company follows international accounting standards. You can check the same in their financial statements and balance sheet.

As per this method, you have to club the book value of all the tangible assets.

Then the book value of all tangible liabilities is taken together and then you need to subtract the same from the assets’ value as mentioned above.

The assets must have fair value and they must revalue the assets and liabilities every year.

In this method, you may need to calculate a capitalization ratio as well and apply the same.

Out of intangible assets, only goodwill can be an asset and no other intangible assets. Goodwill can be added because it cannot be generated by the firm internally.

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Present Value Method or Price to Earnings Ratio – Valuation of Unlisted Shares

This is one of the most popular methods for company valuation. In this method, you need to anticipate the future cash flows of the company.

Then you have to discount these future cash flows with an implicit discount rate. The discount rate you can derive from the listed companies in the same industry.

For calculating the future cash flows, you need to consider recent earnings from the past.

The price-to-earnings ratio of the industry can also be put to use as the discount rate for discounting the cash flows. This is also known as Discounted Cash Flow method (DCF).

The formulae for DCF is –

DCF = {CF₁/(1+r)¹} + {CF₂/(1+r)²}+………{CF_n+(1+r)ⁿ}

= ⁿ∑_t=1 CF_t/(1+r)^t

Net Asset Value – Including Goodwill and Identified Intangibles

This method includes all the assets at their current price.

The difference between this method and the Book value method is that the latter use historic price while NAV is based on current prices in the share market.

You need to calculate the value of the total assets and liabilities taking the market price.

Then deduct the value of liabilities from the value of assets. This method considers all assets – both tangible and intangible assets (which can be identified).

The method considers recent appraisals within one year.

Net Asset Value – Excluding Goodwill and Identified Intangibles

This method is similar to the one immediately above however, the only difference is that it excludes the goodwill and intangible assets and liabilities while the above one includes the same.

Under this method, the assets’ and liabilities’ values are considered at their current market price.

Valuation of Unlisted Shares – Conclusion

Though there are multiple methods of valuing the unlisted shares of a company, the most used methods are the Present value method or discounted cash flow method, and book value method.

Apart from these two, the others are used very rarely. The valuation of unlisted shares is very crucial for the investor.

However, due to the lack of availability of information and financial data of the company, the valuation is very difficult.

So, if you are investing in unlisted stocks of any company, you need to find out whatever information is available and also process them well so that you can get closer to the Fair market value of the unlisted shares.

FAQs – Valuation of Unlisted Stocks

Here are the FAQs on Unlisted Shares Valuation –

What are cash flows?

Cash flows are the payments and receipts of money against products or services provided or for non-operational activities as well.

For instance, a debtor cleared his or her dues, it is an operational cash flow and to be specific cash inflow.

Similarly, if the company is paying its suppliers for the raw materials then it is an operational cash outflow.

Cash flows are a very important part of the financial statements of a company and in the valuation of the company.

What is NAV?

NAV stands for Net asset value. Net asset value is the value that is derived by deducting the value of the liabilities (except equity) of the firm from its value of the assets.

What are intangible assets and liabilities?

Intangible assets and liabilities are those assets and liabilities which you cannot measure in quantity but they have their value.

For instance, goodwill, cannot be measured in some units like kg/liter/pieces or any such units but it has its value.

What is the book value of a company?

Book Value of a company means the net difference in the value of its assets and liabilities.

Total assets’ value as per the balance sheet is taken and then total liabilities value is deducted from the same.

What is the present value?

Present value is the value of certain future cash flows discounted at a given rate. You can use this for anticipating the future valuation of stocks, company or other investments.

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