What is Overvaluation

 

Recently, you read the news of Adani Case in which Hindenburg report blames that Adani increased his share price artificially through market manipulation. It is also question, is Hindenburg report true or not. But if you are new in share market and finance, you should know what is overvaluation. 

Overvaluation is the current market price which more than its current financial assets. 

Suppose, A company share is Rs. 100 and it has 1000 share holders , so total current value is Rs. 1,00,000 but actual net assets after deducting all liabilities, it is 75,000 , then its actual value of share must be Rs. 75. 

There are lots of Reasons of Overvaluation of Share of any company

1. Time period is boom period and people are over confident and regular buy of share, so, its value increases than its actual net worth.

2. Company promoters and owner did large number of marketing. Whether it is true or not, it is different concept but it makes the blind to investor and they started to buy more and more in the demat account, so, price overvalued. 

3. Company started benami transaction through accounting fraud and market manipulation in which it makes foreign companies. First of all foreign companies inflow the cash and it shows as Sale and income. but no record of actual sale. Now, this increased the net profit in the financial statements. 

Now Price / Earning ratio has increased and it attract more and more new investors and they started to buy shares. Supply less and demand artificially increased due to this and it has increased its price. So, stock became overvalued. Now for more increased the price, same company got the big loan on overvalued shares and same loan, then buy all the properties and attract more and more investors that it has big properties. 

How can find this overvalued shares 

Simple 

Buy one share from DEMAT Account and weight 2 years and see how much it has given dividend. It nil, it means, it does not have any earning to give reward to investor who invested his hard earned money. 

Read Also 

What is Undervalued Share?

How to Decide which share is Overvalued?

With following calculation, we can decide which share is overvalued or which is share is averaged or which share is undervalued?

Price Earning Ratio

Price earning ratio is the ratio between price of share and earning on same equity share capital. Means, we can calculate price per share which is divided by earning per share. 

If price of any share is 1000 but its earning per share is 8, it means for earning just 80 paisa, it has to invest Rs. 100. It means, same company has fake asset which does not generate income for share holders. 

So, investor must focus not to invest in such shares. 

2. Price Book Ratio (P/B Ratio) 

It is the ratio of per share market price and per book value asset

per book value of asset = total asset / total no. of shares in the market

if the market price of share is more than book value of share, it is overvalued shares, and it should not be bought. 

3. Company has big loan