/
Banking
kavya-mehta
Decoded
Understanding Yield
Yield in financial ratios is always based on market price.
Dividend Yield is calculated as: Market Price per ShareDividend
per Share
A higher dividend yield implies a lower market price relative to
the dividend received.
Dividend investing is common in developed countries, where the
focus is on high-dividend-paying companies.
In emerging markets like India, the emphasis is more on capital
appreciation due to high-growth potential.
For dividend investing in India, PSU (Public Sector Undertaking)
stocks are often considered for regular income.
The video demonstrates using a screener to find companies with
high dividend yields (e.g., above 4%) and substantial sales (e.g.,
over ₹1000 crore), highlighting companies like Vedanta and
Hindustan Zinc.
Relative Pricing Principles
Relative pricing, also known as relative valuation, determines a
company's price by comparing it to similar companies in the market,
rather than its intrinsic value.
Why use Relative Pricing over Discounted Cash Flow (DCF)?
It can value non-cash-generating assets (e.g., paintings,
cryptocurrencies).
It incorporates market sentiment, which DCF does not.
It is generally less complex and quicker than DCF.
Two main approaches to Relative Pricing:
1. Comparable Companies Approach (Comps): Compares a
company to similar publicly traded companies.
2. Comparable Transactions Approach: Analyzes prices at which
similar companies were previously acquired or merged.
Comparable Companies Approach
Identify Comparables: Find companies that are both similar (same
business, products) and comparable (similar scale, operating in
similar markets/geographies).
Look for a Common Comparator (Multiple): Identify common
financial metrics (e.g., EV/EBITDA, EV/Revenue, P/E Ratio) among
comparable companies and calculate their median.
Price the Target: Apply the median multiple from comparable
companies to the target company's corresponding financial metric to
determine its enterprise value.
Key Valuation Ratios
P/E Ratio (Price-to-Earnings Ratio): Earnings per SharePrice
per Share
Indicates how much investors are willing to pay for each rupee
of a company's earnings. A lower P/E typically suggests a
cheaper stock.
PEG Ratio (Price/Earnings to Growth Ratio): Earnings
GrowthP/E Ratio
Addresses the limitation of the P/E ratio by incorporating
earnings growth. A lower PEG ratio (ideally below 1) suggests a
company with strong growth potential at a reasonable price.
Price to Book Value (P/B Value):
Compares a company's market price to its book value (Assets -
Liabilities).
Most relevant for financial service companies (e.g., banks,
NBFCs), as their business is primarily driven by their assets and
liabilities.
EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes,
Depreciation, and Amortization):
EBITDAEnterprise Value
Represents the value of the entire business relative to its
operational profitability.
EV/Sales (Enterprise Value to Sales):
Used for companies with negative profitability or EBITDA.
Indicates how much value is generated for each rupee of sales.
Net Asset Value (NAV) Approach:
Calculated as: Market Price of All Assets−Market Value of All
Liabilities
Used in mutual funds and during company liquidation.
SOTP (Sum of the Parts) Valuation:
Used for diversified companies with multiple distinct business
segments (e.g., ITC).
Each segment is valued individually based on its specific risk and
growth profile, and then summed up.
New-Age Business Valuations:
For startups or companies with no revenue/profit, valuation can
be based on metrics like active users (e.g., Monthly Active
Users - MAU) or watch hours.
Important Considerations in Valuation
Lack of Precision: Valuation always involves assumptions and
discretion, so 100% accuracy is unattainable.
Dynamic Nature: Valuations are not static; they evolve as the
business and market conditions change.
Two Aspects of Value: A company's valuation comprises both its
current assets and its future earning potential. The dominant
aspect depends on the company's growth prospects.