I have been in the markets for a real long time. As a friend says when we entered the market flying was considered dangerous and sex was considered safe! I started learning about something called PRICE-DIVIDEND RATIO. I was told dividends are the only thing that a small investor knows for real, so he should be interested in that. I liked it.

However a little while later my “juniors” told me PDR is so old fashioned, you should be looking at PRICE EARNINGS RATIO. With some difficulty I understood that PER stands for quality of management, what the market expects from the company, etc.

I had barely mastered that when I was told to learn about PER to Growth ratio. A ratio more than “1″ was considered aggressive. They said this was ‘PEG’…well no comments.

Then suddenly I grew old. A new gen was born and they told me “P” is relevant but “E” has now been redefined. Now it is called “EBIDTA”. Wow! that was a mouthful.

When I found that it stood for Earnings Before Interest, Depreciation, Tax and Ammortisation, to my CA mind and naked eye it looked like what we called “Gross Profit”. Now these kids told me “Uncle may be you should rethink. You know this time it is different”.

I gulped maybe I was not learning fast enough. However by the time I was learning this Mr. Mehta told me (actually, personally) that when you are seeing a company you should see what is the “replacement cost” of a company’s assets. And the Market Cap to Replacement Cost ratio is the most important ratio.

Then by the time I recovered I found a new valuation tool. It was called “Eye-balls” based valuation. The venture capitalist thought it was ‘Eye-balls to valuation ratio’ , the businessman thought it was -“i’ and balls to valuation ratio” – clearly I was important.

Vow! I was now grey. All my old tools told me that a person invested money to get returns. Now that was turned on its head. I was told that a company was measured by its….balls! So what if it was “eye-balls”.

By the way anybody out there knows what is DCF? I was told this is a very old tool which was once used to measure company’s share price. I just lost it. I must have known it when I passed my CA exam! Or Gordon? Or Fisher? well I had heard about Gordon and Fisher sometime while doing valuation of shares, help!!

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  1. I have heard a statement

    “Profit is a matter of opinion but cash is fact”

    There are hundred ways to manipulate profit figures but cash is difficult to fake.

  2. DCF is Discounted Cash Flow method of equity valuation. In essence it means assuming future dividends of a company, interpolate it to present (PV)and arriving at the Fair Value of that scrip. In other words, it is the sum of dividends (Cash) flow from that compnay discounted to today.

  3. I think its DCF ultimately. Valuation is all about present value of future cash flows, whether it’s dividend discount model, PE ratio, PEG ratio, EBITDA.

    But end of the day, all DCF calculations reflect your subjective opinion.

  4. Equity valuations is not just getting numbers and use mathematical operators over it.
    There are some startup which will make quarterly losses in initial years, may be as long as 8 years, before turning profitable and then become huge.
    It all depends on business model and “expected” growth, “expected” profit margin.
    In short, the future should be taken into account and not the past. And that is a difficult thing to do.

  5. ‘Eye-balls” based valuation’ what is that? can anybody explain?just for knowledge. is it valuation through intuition ?

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