How to value a company that is quoting below book value?



1
How would you evaluate a company that is quoting below book value and has had patchy results over a few years? How does one identify a multibagger? How does one evaluate a banking and non-banking finance company? In the case of finance companies my take is that the more debt they have on book the better they are. Am I correct?

2 Answer(s)


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A company quoting below book value and having patchy results over few years is indeed in a bad shape. Unless there is some upcoming government policy that provides impetus to the company, or a new line of business or management that is going to rehaul the company or some kind of capex that is begining to pay off there is no reason such a company will be a multibagger

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In case of finance companies, more debt does mean a better ROE (return on equity), but obviously there is a safe limit. Leverage ratios of below 10% are typically safe. Banks such as ICICI, YES, Axis etc have leverage ratios around 7%,8%,9% etc.

Another important criteria to analyse banks is NPA's (non-performing assets). Even with a safe leverage ratio, NPA's couls destroy a balance sheet in just 1 financial year. NPA levels greater than 7% are deemed risky.

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