Determining the Value of Unlisted Equity Shares: Common Methods

If you’ve ever wondered how the value of unlisted equity shares is determined, you’re not alone. Unlike publicly listed shares with a clear market price, unlisted shares don’t offer the same straightforward approach. 

This can make figuring out their value more challenging, especially regarding decisions around mergers, acquisitions, or company growth. Whether you're a business owner, investor, or simply someone interested in the financial side of unlisted companies, understanding how to value these shares is crucial.

In this blog, we’ll explain why using valuation methods is essential, & highlight the considerations when valuing unlisted shares. We will walk you through some of the most commonly used methods, including the Discounted Cash Flow (DCF) method, Comparable Company Analysis (CCA), the Net Asset Value (NAV) method & many more. 

By the end of this blog, you’ll have a clearer understanding of the valuation methods and how they can help you assess the value of unlisted equity shares more accurately.

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Why do Valuation Methods Matter for Unlisted Equity Shares?

Using proper valuation methods is essential when determining the valuation of unlisted equity shares because it ensures you have an accurate, fair, and transparent understanding of their worth. Here are some key reasons why they are important:

1. Accurate Value Assessment: When you use the correct methods, you can determine the actual value of unlisted equity shares. This helps you avoid the uncertainty of guessing or relying on outdated information.

2. Better Decision-Making: Whether you're buying, selling, or even just managing shares, proper valuation gives you a solid basis for your decisions. It helps you make more informed choices without second-guessing the price of the shares.

3. Transparency: A precise method to determine value ensures the process is transparent. It builds trust with other stakeholders, whether investors, business partners, or legal authorities.

4. Legal and Regulatory Compliance: In India, there are certain rules and regulations around valuing unlisted equity shares, especially for legal matters like mergers or shareholder disputes. Following proper methods helps you stay in line with these requirements.

5. Comparison with Peers: Proper valuation methods allow you to compare unlisted shares with similar businesses. This helps you gauge where the company stands in its industry, even without a public trading price.

6. Identifying Risks: You can spot potential risks using established valuation methods. This helps you better understand the challenges that might affect the company’s value in the future.

Understanding the value of choosing the right method is just the beginning. Next, we’ll discuss the critical factors to consider when valuing unlisted equity shares.

Key Considerations When Valuing Unlisted Equity Shares

When valuing unlisted equity shares, it’s important to remember several key factors to ensure an accurate and realistic assessment. Here’s what you should consider:

1. Financial Health of the Company

The company’s financial performance plays a crucial role in determining its value. This includes analyzing the balance sheet, income statement, and cash flow statement to assess profitability, liquidity, and growth potential. 

Platforms like Precize provide investors access to detailed financial data, including research reports, balance sheets, and cash flow statements, to aid in making informed decisions. Precize also offers a streamlined process for exploring unlisted shares, making evaluating and accessing opportunities easier.

2. Industry and Market Conditions

The industry in which the company operates can significantly affect its valuation. Factors such as market trends, competition, regulatory environment, and the overall economic situation must be considered. 

If you want to assess unlisted shares, platforms like Precize provide the latest news and research reports on private companies. This can help investors better understand the broader context in which these companies operate.

3. Discounts for Lack of Liquidity

Unlisted shares are often less liquid than listed ones, meaning buying or selling them quickly at market value can be more challenging. 

Platforms like Precize provide a more accessible and streamlined process for buying, selling, and liquidating unlisted shares. Precize’s low minimum investment threshold of ₹10,000 and its focus on making the process hassle-free also ensure that investors have better flexibility when dealing with these shares.

4. Growth Potential

A company’s future growth prospects are a critical factor in its valuation. Understanding the company's expansion plans, market opportunities, and ability to increase revenue and profits can give a clearer picture of its value.

5. Valuation Methodology

Different valuation methods can yield different results. It’s important to choose the method that aligns with the company’s situation and industry. Multiple valuation approaches can help cross-check results and provide a more accurate estimate.

Now that you’re clear on the essential factors, let’s take a closer look at the methods typically used to value unlisted equity shares.

8 Common Methods for Valuing Unlisted Equity Shares

When it comes to the valuation of unlisted equity shares, several methods are commonly used to estimate their worth. These methods help investors, businesses, and financial analysts assess the fair value of shares in privately held companies. The most commonly used valuation methods are:

1. Book Value Method

The Book Value Method calculates a company's value based on its balance sheet. It involves subtracting the total liabilities from the total assets to determine the company's equity, which can then be divided by the number of outstanding shares to find the book value per share.

For example,  if a company has total assets worth ₹50 lakhs and total liabilities of ₹30 lakhs, the book value would be:

Book Value = Total Assets - Total Liabilities = ₹50,00,000 - ₹30,00,000 = ₹20,00,000

If there are 1 lakh shares outstanding, the book value per share would be:

Book Value Per Share = ₹20,00,000 / 1,00,000 = ₹20

Advantages of Using This Method:

• Simple to calculate.

• Useful for companies with significant tangible assets.

• Can provide a floor value for the company.

Drawbacks to Keep in Mind:

• Doesn’t account for intangible assets (like brand value or intellectual property).

• It may not reflect the company’s actual market value.

• It is not ideal for companies with minimal tangible assets or growing companies.

2. Recent Transaction Price Method

The Recent Transaction Price Method uses the price at which shares were last traded. This method assumes that the transaction price accurately reflects the company’s value, assuming both buyer and seller were independent and there were no external pressures.

For example, if the last transaction for an unlisted share occurred at ₹150, and both the buyer and seller were independent and not under pressure, this ₹150 can be used as a basis for the current share value.

Advantages of recent transaction price method:

• Provides a market-based price if recent transactions were fair.

• Easy to apply when data is available.

 Limitations  of recent transaction price method:

• It may not reflect the current market conditions if the transaction occurred a while ago.

• It can be skewed if the transaction is pressured or not representative of market value.

• Doesn’t account for any changes in the company’s situation since the last transaction.

3. Discounted Cash Flow (DCF) Method

The DCF method estimates the value of a company based on its projected future cash flows, which are then discounted to present value using an appropriate discount rate. This method is useful for companies with predictable future cash flows.

For example, if a company is expected to generate ₹10 lakhs in annual cash flow for the next five years, you apply a 10% discount rate. To calculate the Present Value (PV) of these cash flows, you use the formula:

PV = Σ (CFt / (1 + r)^t)

CFt is the cash flow at time t, and r is the discount rate. 

Strengths of This Method:

• Provides a more forward-looking valuation based on expected earnings.

• Useful for companies with stable and predictable cash flows.

 Challenges of This Method:

• Requires accurate forecasting of future cash flows, which can be difficult for start-ups or companies with volatile earnings.

• Sensitive to changes in the discount rate, which can drastically affect the outcome.

• Requires significant data and assumptions, which may lead to varying results.

4. Price-to-Earnings (P/E) Ratio Method

The P/E ratio compares a company’s earnings per share (EPS) to its share price. The P/E ratio method estimates the company’s value based on the average P/E ratio of similar companies.

For example, if a company has earnings per share (EPS) of ₹5 and the average P/E ratio for similar companies is 15, the estimated value per share would be:

Estimated Value = EPS × P/E = ₹5 × 15 = ₹75

Pros of This Method:

• It is easy to calculate if P/E ratios for comparable companies are available.

• It is widely used in the market, making it a familiar method.

Drawbacks to Consider:

• It is only useful for profitable companies with stable earnings.

• It can be distorted if comparable companies have different growth rates or risk profiles.

• Doesn’t consider the company’s growth potential.

5. Net Asset Value (NAV), Including Goodwill & Identified Intangibles

The NAV method values a company based on its total assets, including intangible assets such as goodwill, brand value, or intellectual property minus liabilities.

For instance, if  a company has ₹40 lakhs in tangible assets, ₹10 lakhs in goodwill, and liabilities of ₹20 lakhs, the NAV would be:

NAV = (Tangible Assets + Goodwill) - Liabilities = (₹40,00,000 + ₹10,00,000) - ₹20,00,000 = ₹30,00,000

Benefits:

• Provides a more comprehensive view by including intangible assets.

• Useful for businesses with valuable intellectual property or goodwill.

Considerations:

• It is hard to value intangible assets accurately.

• It can be inflated by including goodwill, which is not always easily realized.

• Doesn’t reflect the company’s earnings potential or market position.

6. Net Asset Value (NAV) Excluding Goodwill & Identified Intangibles

This method calculates the NAV but excludes intangible assets such as goodwill. It focuses purely on tangible assets.

For example, using the same figures from the previous example but excluding goodwill, the NAV would be:

NAV = Tangible Assets - Liabilities = ₹40,00,000 - ₹20,00,000 = ₹20,00,000

Advantages of This Method:

• A more conservative approach, as it only considers tangible assets.

• It is helpful for companies where intangible assets are difficult to value.

 Disadvantages of This Method:

• It may underestimate the actual value of a company, especially if it has valuable intangible assets.

• Doesn’t reflect the full market value of the company.

7. Comparable Company Multiple Method (CCMM)

The CCMM compares the unlisted company with similar publicly traded companies and uses valuation multiples (like P/E ratio, EV/EBITDA, etc.) to estimate the value.

For instance, if similar companies have an average P/E ratio of 12, and your company’s EPS is ₹6, the estimated value per share would be:

Estimated Value = EPS × Average P/E = ₹6 × 12 = ₹72

Pros of This Method:

• Based on market data and comparables, it is more realistic.

• Quick and straightforward to apply if data is available.

Possible Limitations:

• Choosing comparable companies is critical, and finding genuinely comparable companies can be challenging.

• The market may overvalue or undervalue comparable companies, skewing the results.

8. Last Transaction Price Method

The Last Transaction Price Method uses the price from the most recent transaction involving shares as a benchmark for valuation. This method assumes that the cost from an independent transaction reflects the actual market value of the shares.

For example, if the last recorded price for an unlisted share was ₹200 during an independent transaction. In that case, you can use this ₹200 as the valuation for the share, assuming no significant changes in the company’s situation since that time.

Advantages of Using This Method:

• Provides a real-world market price if the last transaction was fair.

• Simple to use if transaction data is available.

 Drawbacks to Keep in Mind:

• It may not reflect current market conditions or company performance.

• It can be outdated if the last transaction was far in the past or under unusual circumstances.

Conclusion

The valuation of unlisted equity shares is typically carried out using several commonly employed methods, including the DCF method, the Book Value method, and others such as Comparable Company Analysis and Net Asset Value. These methods help you determine the fair value of unlisted shares, even without a market price. 

Accurate valuations are essential for you to make informed decisions, as they provide crucial insights into the potential worth of a company and help navigate the complexities of unlisted equity markets.

Whether you're looking to buy, sell, or liquidate unlisted shares, platforms like Precize offer a simplified way to manage these transactions.

Precize allows you to explore unlisted shares, making the buying and selling process more straightforward while supporting the liquidation of shares, ensuring a seamless experience.

Reserve access to Precize to further diversify your portfolio!