In the stock market, price determination of shares is one of the most important things. Everything depends on the valuation of stocks. If you buy shares at fair valuation then chances of making money are high in the unlisted market.

When a company is listed with stock exchanges, it is very easy to calculate the value of stock but if the company is unlisted, it becomes very difficult to value it.

To calculate the value of unlisted shares there are some methods which can be used.

1. Based on the Last Valuation in the Private Market

In this method, the price at which the company has raised funds in the private market can be used for the price determination of the unlisted shares.

For Example:

Let us suppose that Swiggy shares are not available in the unlisted market. And, there is an ESOP holder who wants to sell his/her shares in the unlisted maret. While selling the unlisted shares, he/she will use the last funding round as a base to negotiate with the dealers in the market. Then as per negotiation the unlisted shares price is decided. Once the shares come in the unlisted market, the dealers further sell to the investors by adding margin or commission depending upon demand and supply.

Bull Case Scenario

Imagine 200 Shares of Swiggy have entered the unlisted market at Rs. 4 lac per share. The demand in the market for Swiggy Shares is 400 Quantity. That means supply is less , demand is high. The value of the unlisted share of Swiggy will go up. It might go to say 4.5 Lac per share at which buyers are ready to buy.

Bear Case Scenario

Imagine 1000 Shares of Swiggy have entered the unlisted market at Rs. 4 lac per share. The demand in the market for Swiggy Shares is only 100 Quantity. That means supply is high , demand is less. The value of the unlisted share of Swiggy will go down. It might go to say 3.5 Lac per share at which buyers are ready to buy.

This way price moves in the short term depending on demand and supply in the unlisted market.

2. Book Value Method or NAV Method

As per this method, you have to club the book value of all the tangible assets and tangible liabilities separately and then subtract the liabilities from the assets value.This way we have found the book value of the company. After finding the Book Value, we have to calculate the Price/Book Value. As a thumb rule, the P/B of less than 5 is considered as undervalued.

3. Present Value Method (DCF)

This is one the most popular methods to calculate the share price of unlisted shares. In this method, you need to anticipate the future cash flow of the company. Then discount the cash flows by weighted average cost of Capital and find the present value of the company. Then divide that value by the number of shares outstanding to get the per share value of the company.

However, this method can not be used by normal investors as it requires a lot of understanding of the business model of the company and a lot of assumption data. This method is generally used by registered valuers to find the fair value of unlisted shares whenever companies need to raise funds from the market.

4. Market Comparable Method

Under this method, the investor just needs to find a listed company which is a peer to the unlisted company to whom he/she wants to value. Then investors can use the methods like P/E, Mcap/Sales, EV/EBITDA etc. to compare both the companies. And, if the unlisted company is available at a discount to the listed peer, it can become a good value buy.

For Example:

Care Health Insurance is an unlisted company and you want to know whether the CMP of Rs.150 per share is fairly valued or not. Then under this method, first we will find the peer in the listed market. If you do quick research, then you will find that Star Health is the nearest peer. After that we will use the metric called Mcap/GWP. Then after finding the value of Mcap/GWP, we can decide whether Rs.150 per share value of Care Heath is value buy or not.