What does the company's value tell you?

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Once you arrive at the value of a company, what do you do with that number? What does it mean in the practical sense?

Transcript

What does the company's value tell you? Fundamentally, the value of a company tells you what it’s worth. It reveals if a company’s shares are overvalued Or undervalued. Overvalued shares trade at market prices that are significantly higher than their fair value. For example, say the shares of a company are trading on the market for Rs. 180 each. But based on your valuation method, you determine that the shares are worth Rs. 100 each. This means that the shares are overvalued in the market. Overvaluation may occur due to increasing investor confidence in a company. Conversely, undervalued shares trade at market prices that are significantly lower than their fair value. For instance, say the shares of a company are trading on the market for Rs. 50 each. But based on your valuation method, you determine that the shares are worth Rs. 120 each. This indicates that the shares are undervalued in the market. Undervaluation may occur due to decreasing investor confidence in a company. You can make use valuation ratios to determine the value of a company. Head to the next chapter in Smart Money to learn more about these ratios.