Top 6 Methods To Value Unlisted Shares For Smart Investment Decisions

If you’ve ever thought about expanding your investments beyond the regular stock market, unlisted shares offer an exciting path. These are shares of companies that are not listed on any stock exchange, yet they often have strong growth potential. Many startups, pre-IPO businesses, and even well-established private companies issue unlisted shares. Since they operate outside public markets, they often provide early investment opportunities before the company expands or goes public.

Valuing listed stocks on exchanges like the NSE or BSE is relatively easy, as their market prices are publicly available. However, the valuation of unlisted shares is more complex since these shares lack a real-time market price. Instead, their value is estimated using financial data such as book value, past performance, or future earnings potential. 

For investors, especially value investors, understanding these valuation models is essential. It helps you determine whether the shares are fairly priced or not, allowing you to make informed decisions. 

Choosing the right method of valuation of shares of unlisted companies plays a major role in uncovering investment opportunities in the private market.

Why Do You Need To Know How Unlisted Shares Are Valued? 

Unlisted shares don’t have a fixed market price like listed stocks. So, understanding the valuation of shares of unlisted companies helps you in making smart investment decisions. 

Here’s why this matters:

• Fair Pricing in Private Deals: If you are buying or selling unlisted shares privately, valuation helps you avoid overpaying or underselling.
• Better Investment Decisions: Knowing the real worth of shares allows you to make informed choices instead of guessing.
• For Tax Purposes: When calculating capital gains or dealing with employee stock options (ESOPs), valuation helps determine your tax liability.
• Regulatory Needs: During fundraising, mergers, or share transfers, valuations are needed for legal and compliance reasons.
• Clarity for Employees: If you are working in a company that offers ESOPs, valuation tells you how much your shares are actually worth.

Economic factors also influence valuation of unlisted shares. For example, interest rates play a big role. When interest rates go up, the cost of borrowing rises, and future earnings of companies may decrease, which can reduce valuations. On the other hand, when interest rates fall, valuations often increase. 

Valuation Methods For Unlisted Shares 

Since unlisted shares are not traded on a stock exchange and do not have a fixed market price, they are typically bought and sold through the over-the-counter (OTC) market. Because there is no standard method that works for every company, the valuation of shares of unlisted companies can be done using different approaches. 

Depending on the business type, financials, and purpose of the valuation, one or more of the valuation techniques may be used to estimate the value of unlisted shares.

Here are some commonly used methods for the valuation of shares of unlisted companies:

Book Value Approach

The book value method is one of the simplest ways to calculate the value of a company. It is based on the company’s balance sheet. You take all the company’s assets (such as cash, equipment, and buildings) and subtract its liabilities (such as loans and expenses). The result is called the book value.

If a company has strong assets and low liabilities, its book value will be high. However, this method may not fully reflect the company’s earning potential or growth. It is best suited for companies that have a lot of physical assets and are not growing rapidly.

Method of Last Transaction Price

In this method, the value of shares is based on the most recent transaction. For example, if the company raised money from investors six months ago, the price paid by those investors can be used as a reference.

This method is useful when there has been a recent investment round or share sale. However, it might not reflect the current value if the transaction happened a long time ago or under different market conditions. Still, it gives a useful starting point for estimating the value of unlisted shares.

Discounted Cash Flow Method or Price to Earnings Ratio

This is one of the more detailed and widely used methods. In the DCF method, the future cash flow that the company is expected to generate is calculated and then discounted to its present value. Interest rates are used to calculate the present value of those future earnings. This method is helpful for companies that have stable and predictable income.

The P/E ratio compares a company’s current earnings to its share value. It is often used for companies that are already profitable. For example, if a company has a high P/E ratio, it may be considered overvalued unless it has strong growth prospects.

Both DCF and P/E methods require detailed financial data, so they are usually used by experienced investors or financial experts.

Value of Net Assets (NAV) Including Goodwill

This method looks at the total net worth of the company, including goodwill and other intangible assets like brand value, patents, or customer relationships. If a company has a strong reputation or valuable intellectual property, these add to its worth.

The NAV, including the goodwill method, is suitable for companies where intangible assets form a large part of their value. However, estimating the worth of goodwill is not always easy, and different experts may give different values.

Value of Net Assets (NAV) Excluding Goodwill

This is a simpler and more conservative version of the NAV method. It includes only the tangible assets of a company, like land, buildings, and machinery. It excludes goodwill and other intangible assets.

This method gives a more realistic base value and is often used when intangible assets cannot be measured properly. It is useful for companies with low brand value or where hard assets are more important.

Market Comparable Method (Comparable Company Analysis)

In this method, a company is compared with other similar companies that are listed on the stock exchange. If those companies have similar revenue, profit, or business models, their valuation ratios are used to estimate the value of the unlisted company.

This is a very practical approach, especially in industries where standard ratios and financial metrics are available. However, it works best when there are enough comparable companies and reliable market data.

Choosing The Right Valuation Method For Unlisted Companies

There is no single method that fits every unlisted company. The right method depends on a few important things:

• Financial Condition of the Company: If the company is profitable and has stable earnings, methods such as DCF or P/E ratio are effective. If the company is asset-heavy, book value or NAV methods are better.
• The Reason for Valuation: If you are valuing shares for tax purposes, you might need a different method than if you are preparing for a merger or funding round.
• Data Availability: Some methods need detailed financial data, forecasts, or industry comparisons. If this data is missing, simpler methods like book value or last transaction price are more practical.

Conclusion

Understanding the valuation of unlisted shares is not just about numbers. It gives you the confidence to invest wisely, value your employee stock options correctly, or assess opportunities in private markets. Since these shares are not traded publicly, knowing their real value helps you avoid costly mistakes and take advantage of high-growth investments. 

Whether you are a first-time investor or someone looking to expand your portfolio, learning about the method of valuation of shares of unlisted companies is a smart move.

With the right knowledge and support, investing in unlisted shares can be just as rewarding as investing in traditional stocks on the stock market.