Question

Explain each of the three approaches of ordinary share valuation a) book value b) liquidation c) P/E multiples. Which of these is considered the best and why?

Answer 1

(a) Book Value : Book value per oridnary share (or, simply book value per share - BVPS) is a method to calculate the per-share value of a company based on common shareholders' equity in the company. Should the company dissolve, the book value per common share indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.

The Formula for Book Value Per Common Share Is

The book value per common share (formula below) is an accounting measure based on historical transactions:

BVPS = (Total Shareholder Equity−Preferred Equity)/Total outstanding shares

(b) Liquidation : An account liquidation occurs when the holdings of an account are sold off by the brokerage or investment firm where the account was created. In most cases, this is down to satisfy margin requirements. When you sign up for a margin account with a brokerage firm, you grant that the legal right to liquidate your holdings if you are unable to meet the account's requirements.There are two main brokerage account types: cash accounts and margin accounts. A cash account only allows an investor to purchase securities up to the amount of the cash held in the account.

(c) P/E Multiples : The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

P/E multiple is considered the best because it focuses on the earnings of the company, which is one of the primary drivers of an investment's value.