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Relative value method to calculate intrinsic value of stock

 

Introduction:-

This method is not popular as the DCF model for calculating intrinsic value of any stock because of its simplicity.  In this method you compare your stock with other companies stocks to get your intrinsic value.
Intrinsic value and how to calculate intrinsic value of any share?

Formula:-
Intrinsic value = [industry PE ratio] * [earning per share (of my company)]

Example:-

Let assume, there is one cement company ABC and share of it trading at the price of Rs. 60 and earnings per share of ABC company is Rs 5. Then for calculating its intrinsic value we need cement industry’s PE ratio that is 28. Now calculate intrinsic value:-

Share price of ABC company = Rs 60
Earnings per share of ABC company = Rs 5
Cement industry PE ratio = 28
Intrinsic value = [industry PE ratio] * [earning per share (of my company)]
                        = 28 * 5
                        = Rs 140

Limits of using Relative value method:-
It’s a not standard method to calculate intrinsic value of any stock, this method popular only because of its simplicity or very simple to use. What reasoning works in it, who knows?
For calculating intrinsic value of any stock DCF method is standard method.

"GOOD LUCK"

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