You ask three people what a company is worth and get three answers: ₹400, ₹1,100, and "you cannot really value this one". None of them is being difficult. They have used three different families of method, and the methods genuinely disagree, because each is answering a slightly different question about the same business.
A man is selling his taxi. The first buyer prices the vehicle — what the car, the meter and the permit would fetch if sold off tomorrow. The second prices the earnings — it clears ₹40,000 a month, so what is a stream of ₹40,000 a month worth to me. The third asks only what the last three taxis with that permit sold for in the same city. Three sensible people, three different numbers, and nobody has made an error.
Those are the three families: what it owns, what it earns, and what comparable things fetch. Almost all of the skill in valuation is knowing which of the three the business in front of you actually suits — and noticing when you have picked one because it gave the answer you wanted.
1. What it owns
Add up what the assets would genuinely fetch if sold, subtract every liability, and what remains belongs to shareholders. Done at fire-sale prices this gives a liquidation value — a floor rather than a valuation. Done at what it would cost to build the same assets today, it gives a replacement cost, which is often the more useful version, because a business selling far below the cost of recreating it will eventually stop attracting new competitors.
- Suits: companies whose assets are separable and saleable — property, land bought decades ago, listed investments in other companies, a holding company that owns stakes in operating businesses.
- Fails: a services company whose value walks out of the building at seven in the evening. The balance sheet of a good consultancy shows a few computers and a rented office.
- Watch for: book values that are badly stale. Land carried at a 1974 cost is worth what it would fetch, not what it cost, and the accounts will not tell you which.
2. What it earns
The going-concern view: the business is worth the cash it will produce for owners from here onward. The complete form of this is a discounted cash flow, covered in the next lesson. The quick forms are the ones most people actually use — a multiple applied to normalised earnings, or an earnings yield compared against what a government bond pays.
3. What similar things fetch
Relative valuation compares the company with its peers today and with its own history. It takes ten minutes rather than an afternoon, which is why it dominates in practice, and it carries one built-in assumption that is easy to forget: that the things you are comparing against are themselves sensibly priced. In a sector priced for perfection, the cheapest member is still expensive.
And a fourth thing that is really a combination
A sum of the parts valuation values each division by whichever family suits it — the property arm on assets, the consumer arm on earnings, the listed stake at its market price — then adds them and subtracts net debt. It is the honest approach to a conglomerate, and the point at which most people discover that one division has been quietly funding another for years.
| Business | The family that fits | Why |
|---|---|---|
| Consumer goods company with steady margins | Earnings or cash flow | The assets are small and the brand throws off fairly predictable cash |
| Real estate developer | Assets — the land bank, project by project | Profit arrives in lumps, so a single year’s earnings describes almost nothing |
| Bank or NBFC | Price to book, read alongside return on equity | The balance sheet is the business, and reported earnings depend heavily on provisioning judgement |
| Cyclical commodity producer | Replacement cost, and mid-cycle normalised earnings | Peak-year earnings valued on a peak multiple is the classic way to lose money in a cyclical |
| Conglomerate with four unrelated divisions | Sum of the parts | No single multiple can describe four different businesses at once |
| A loss-making company with no meaningful assets | None of them, honestly | That nothing can be valued is itself information, not a puzzle to be forced |
- Gives you a floor — roughly what would remain if operations stopped
- Works where the assets have an observable market price
- Ignores earning power, which is usually what actually matters
- Book values can be decades out of date, especially for land
- Values the business as a going concern, which is what it is
- Forces you to state growth and risk assumptions out loud
- Extremely sensitive to exactly those assumptions
- Meaningless where earnings are negative, erratic, or borrowed from one good year
A copper producer earned record profits last year on unusually high metal prices. An analyst values it at 18 times last year’s earnings, the multiple the market pays for a stable consumer company. What is the flaw?
Taxi bech rahe ho. Ek kharidar gaadi aur permit ka scrap-plus daam lagayega. Doosra poochega mahine ka kitna bachta hai — ₹40,000? Toh uska hisaab. Teesra bas itna dekhega ki pichhli teen taxi kitne mein bikin. Teeno sahi hain, teeno ka number alag hai. Sawaal yeh hai ki aapke dhande pe kaun sa tarika fit baithta hai — aur kya aapne wahi chuna jo aapko pasand number de raha tha.
- Three families: what it owns, what it earns, what comparable businesses fetch.
- Asset methods give a floor; earnings methods value the going concern; relative methods are fast but assume the peers are sanely priced.
- Sum of the parts values each division on the family that suits it, then subtracts net debt.
- Picking the family is an assumption, and it decides the answer more than the arithmetic does.
- Run two families and treat the gap between them as information.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- intrinsic value meaning in stocks
- Intrinsic value is an estimate of what a business is genuinely worth based on the cash it can produce over its life, rather than the price the market happens to quote today. It is arrived at through methods such as discounted cash flow, and the whole idea of value investing rests on the gap between this estimate and the market price.
- liquidation value meaning
- Liquidation value is what would be left for shareholders if a company sold all its assets at fire-sale prices and paid off every liability. It represents a floor rather than a true valuation, and it is most relevant for asset-heavy businesses; a services company whose value walks out of the door each evening has almost none.
- the three broad ways to value a company are
- By what it owns, by what it earns, and by what comparable businesses fetch — asset-based valuation, earnings-based valuation such as discounted cash flow, and relative valuation against peers. The three often disagree because each answers a slightly different question, and much of the skill is knowing which suits the business in front of you.
- sum of the parts valuation meaning
- Sum-of-the-parts valuation values each business or segment of a company separately and adds them together, rather than valuing the whole with one multiple. It is used for conglomerates and holding companies whose divisions are so different — say a bank, a paint business and a hotel under one roof — that a single ratio would misprice all of them.