Short answer: Company valuation is the process of estimating a business’s fair or intrinsic worth, meaning the value it has on its own merits rather than the price the market currently puts on it. You then compare that estimate with the market price to judge whether the stock looks overvalued, undervalued, or fairly priced, which is why valuation matters to anyone reading a share price. Analysts usually combine several methods, because no single one gives a complete picture.
Last reviewed: 11 November 2026
At a glance
| Method | How it is calculated | What it tells you |
|---|---|---|
| Market capitalisation | Share price × total outstanding shares | The total market value of the company’s shares |
| Price-to-book (PBV) | Share price ÷ book value per share | A lower ratio sometimes suggests undervaluation |
| Return on equity (ROE) | Net profit ÷ total equity | A consistently healthy return can support a stronger valuation |
| Discounted cash flow (DCF) | Future cash flows discounted to present value | Widely regarded as the gold standard |
| Net asset value (NAV) | Fair value of assets minus liabilities | Suits companies with large tangible assets |
| Price-to-sales (P/S) | Share price ÷ net annual sales per share | Useful when a company’s profits are inconsistent |
How is market capitalisation calculated?
Market capitalisation, or market cap, is the current share price multiplied by the total number of outstanding shares, which are the shares held by investors at that time. It gives the size of a listed company in market terms. Consider a hypothetical company, “Example Engineering Ltd”, with 1 crore shares outstanding at ₹200 each. Its market cap is 1,00,00,000 × ₹200 = ₹200 crore.
The catch is that market cap only restates what the market is paying today. It does not show whether that price is right, so it is a starting point rather than a verdict.
How do price-to-book and return on equity work together?
Book value per share is the company’s net worth divided by its shares, based on the accounting records. The price-to-book (PBV) ratio divides the market price of a share by that book value per share. In a hypothetical case, a share priced at ₹150 with a book value of ₹100 per share has a PBV of 1.5. A lower ratio sometimes suggests undervaluation, but a low figure can also reflect a weak business, so the ratio alone does not explain the price.
Return on equity (ROE) is net profit divided by total equity. If the hypothetical company earned ₹20 crore of net profit on ₹100 crore of total equity, its ROE is 20%. A consistently healthy return can support a stronger valuation. A single year can be unusual, which is why the trend across several years matters more than one figure.
How does discounted cash flow valuation work?
The discounted cash flow (DCF) method estimates the cash a business is expected to generate in future years, then converts each year’s amount into today’s rupees. The conversion uses a discount rate, also called the cost of capital, which reflects the return investors require. The DCF method is widely regarded as the gold standard, but it is only as reliable as its inputs.
Take a hypothetical company expected to generate ₹10 crore of cash flow a year for three years, discounted at 10%. The present values are ₹9.09 crore, ₹8.26 crore and ₹7.51 crore, totalling ₹24.87 crore. Change the discount rate to 12% and the total falls to about ₹24.02 crore. Small changes in assumptions move the answer, and the forecasts themselves are estimates.
When does net asset value matter?
Net asset value (NAV) equals the fair value of all depreciating and non-depreciating assets, minus all outstanding liabilities. It suits companies with large tangible assets, such as land, plants or machinery. In a hypothetical case, a company with assets worth ₹500 crore and liabilities of ₹320 crore has a NAV of ₹180 crore.
The catch is that asset values are themselves estimates, and a NAV figure may not capture how well those assets earn money. A factory valued at its fair value can still produce little profit.
What about price-to-sales and peer comparisons?
The price-to-sales (P/S) ratio divides the share price by net annual sales per share. It is useful when a company’s profits are inconsistent, because sales are often steadier than profit. If a hypothetical share costs ₹300 and sales per share are ₹150, the P/S ratio is 2.0. The drawback is that sales ignore costs, so a company with high sales and heavy losses can still look attractive on this ratio.
Relative valuation compares a company’s ratios with those of similar companies in the same industry. If a company’s PBV is 1.5 while its peers average 2.5, it may be considered undervalued relative to them. The comparison is only as good as the peer group chosen, and a peer set that differs in business mix can mislead.
Why do analysts use several methods together?
Each method looks at a different part of the business. Market cap shows market value, PBV and ROE show the relationship between price, equity and profit, DCF focuses on future cash, NAV on assets, and P/S on sales. When the methods point in the same direction, the picture is more convincing. When they disagree, the difference itself is worth investigating.
Frequently asked questions
Is market capitalisation the same as company value?
No. Market cap is the share price multiplied by outstanding shares, which shows what the market is currently paying. It does not by itself measure intrinsic worth.
Is a low price-to-book ratio always a sign of undervaluation?
No. A lower PBV sometimes suggests undervaluation, but the ratio alone does not show why the price is low. The business’s profitability and assets also need to be examined.
Which valuation method is the most accurate?
DCF is widely regarded as the gold standard, but it depends on estimated future cash flows and the chosen discount rate. Analysts typically combine several methods because no single metric gives a complete picture.
Sources and last check
Facts in this article were checked against the sources below on 11 November 2026. Rules and figures can change; check the primary source before acting.
- icicidirect.com (broker education)
- zerodha.com (broker education)
- 5paisa.com (broker education)
- groww.in (broker education)
- upstox.com (broker education)
- kotakneo.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.