Investing Basics - Feel free to ask the most basic questions

[dineshssairam]

@Rohitsharma

Hi , A small question on valuation of banks and finance companies. What price to book value ratio is generally considered as cheap/Expensive for Banks and Micro finance institutions ? Is a micro finance stock trading at less than 2.5 PBV and a Private bank less than P/BV of 3 are considered undervalued ? I know valuation is subjective but still I would like to know what others think on it.

You’ve already understood it perfectly. Valuation is subjective and Ratios are simply guidelines. For BFSI frms, I would suggest that you use a Dividend Discount Model for valuation.

Our own @Yogesh_s has created one:

Spreadsheet Model for Valuation of a Company

There is a lot of discussion about art of valuation and various techniques to be used in valuations on this site. However, there is no tool available where all these techniques and guidelines can be put together to calculate intrinsic value and expected returns. Several investment books teach discounted cashflow model as the logically correct way to value an asset. However, DCF is difficult to use if you do not use correct inputs. DCF is also highly sensitive to growth rates and discount rates …

Obviously there’s no “acceptable” P/B. Gruh Finance trades at a staggering 16+ P/B Ratio and PNB trades at 0.63 P/B. That may or may not make them overvalued or undervalued right off the bat. You’ll have it value them at the sum of Discounted Dividends in order to find out.