Market Cap & Valuation Basics
Valuation is the art of answering: Is this stock cheap or expensive relative to what the business is worth?
Market Capitalisation
Market Cap = Share Price × Total Shares Outstanding
| Category | Market Cap (India) | Examples |
|---|---|---|
| Large-cap | > ₹20,000 Cr | Reliance, TCS, HDFC Bank |
| Mid-cap | ₹5,000-20,000 Cr | Persistent, Voltas |
| Small-cap | < ₹5,000 Cr | Hundreds of listed companies |
Large-caps are more stable; small-caps carry more risk but more potential return.
Enterprise Value (EV)
Market Cap only measures equity. Enterprise Value measures the whole business:
EV = Market Cap + Total Debt − Cash
This is what an acquirer would effectively pay for the entire company.
The Three Valuation Lenses
1. P/E (Price-to-Earnings) Good for: profitable, mature businesses. Watch out: useless when earnings are negative or distorted.
2. P/B (Price-to-Book) **P/B = Market Cap ÷ Book Value (Net Assets)** Good for: banks, insurance companies, asset-heavy businesses. P/B < 1 means the market values the company below its accounting net worth - either a bargain or a value trap.
3. EV/EBITDA **Earnings Before Interest, Tax, Depreciation & Amortisation** Capital-structure neutral - useful for comparing companies with different debt levels. Industry average EV/EBITDA varies widely: 6-8x for industrials, 20-30x for SaaS.
The Danger of "Cheap"
A stock trading at a low P/E isn't automatically cheap - it may be cheap because the business is declining. Always ask why something is cheap before buying.
Key Takeaways
- •Market cap tells you what the market values the equity at; EV tells you what the whole business costs
- •No single ratio gives the full picture - use them together
- •Valuation only makes sense in the context of growth and quality