NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments

Equity Investments and Valuation for NISM PMS Distributors

Updated 11 October 2026 · Fact-checked

Equity valuation checks whether a share's price is fair compared with the company's earnings, book value, dividends and returns. You calculate ratios such as P/E, P/B, dividend yield and ROE, then compare them with peers and history. Fundamental analysis studies the business; technical analysis studies price and volume patterns.

Understand Equity Investments and Valuation

An equity share gives you part-ownership of a company. You are a residual claimant: you are paid after lenders and preference shareholders. You earn through dividends and capital gains. You also get voting rights and limited liability, which means your loss is limited to the amount you invested.

The key question is whether a share's price is high or low compared with what the company is worth. Fundamental analysis answers this by studying the business: earnings, assets, management, industry and the economy. It estimates intrinsic value and compares it with the market price. Buy if price is below intrinsic value; avoid if well above.

Technical analysis ignores the business. It studies past prices and volumes using charts, trends, support and resistance levels, and moving averages. Its belief is that price already reflects all information and that patterns repeat. It is mostly used for timing entry and exit.

Fundamental analysis has two common approaches. Top-down: start with the economy, pick attractive industries, then pick companies within them. Bottom-up: start with individual companies and choose strong ones regardless of the wider picture. Both end at stock selection; only the starting point differs.

Valuation ratios make companies comparable. P/E and P/B are relative valuation tools. A low ratio is not always cheap, as the market may expect weak growth. A high ratio is not always expensive, as the market may expect strong growth. Always compare with similar companies.

Key formulas to remember

Earnings per share (EPS): EPS = Profit after tax (available to equity shareholders) ÷ Number of equity shares; Preference dividend is deducted from profit first.
Price-to-earnings (P/E): P/E = Market price per share ÷ EPS; Equals market capitalisation ÷ net profit. It shows how many rupees you pay for ₹1 of earnings.
Book value per share: Book value per share = Net worth ÷ Number of equity shares; Net worth = share capital + reserves, for equity shareholders.
Price-to-book (P/B): P/B = Market price per share ÷ Book value per share; Often used for banks and asset-heavy companies.
Dividend yield: Dividend yield = Dividend per share ÷ Market price per share × 100; Uses market price, not face value.
Dividend payout ratio: Payout ratio = Dividend per share ÷ EPS × 100; The rest is retained in the business.
Return on equity (ROE): ROE = Net profit ÷ Shareholders' equity × 100; Measures profit earned on shareholders' money.
Earnings yield: Earnings yield = EPS ÷ Price × 100 = 1 ÷ P/E × 100; Inverse of P/E.

How to solve Equity Investments and Valuation questions

Use this method for any equity valuation question, numerical or conceptual.

1Identify what is asked: a ratio, a comparison, or a concept (fundamental, technical, top-down, bottom-up).
2For numerical questions, write down the given figures with units: price, profit, shares, equity, dividend.
3If EPS or book value per share is not given, compute it first from profit or net worth and the number of shares.
4Pick the formula and check the numerator and denominator: price goes on top for P/E and P/B, but dividend goes on top for yield.
5Calculate carefully and round only at the end.
6Interpret if asked: higher P/E suggests higher growth expectations or a costlier share; compare only with similar companies.
7Match the answer against the options and reject those that reverse the ratio or use face value instead of market price.

Quickest way: Ratio shortcut: price over something

When to use it: Use for numerical MCQs on P/E, P/B, yield and ROE when time is short.

P/E and P/B: price ÷ per-share figure. If total figures are given, use market cap ÷ total profit or total net worth.
Yield and payout: dividend on top. Yield divides by price; payout divides by EPS.
ROE: profit ÷ equity, with no price involved.
Check sense: if P/E is 20, earnings yield is 5%.
For concept questions, remember: fundamental means business value; technical means price patterns; top-down starts from economy; bottom-up starts from company.

Common mistakes in Equity Investments and Valuation

Calculating dividend yield on face value
Dividends are often declared as a percentage of face value, which is confusing.
Fix: Convert to rupees per share first, then divide by current market price.
Treating a low P/E as always cheap
Students memorise the rule of thumb as absolute.
Fix: A low P/E may reflect poor growth or high risk. Compare with peers and growth prospects.
Mixing up top-down and bottom-up
The names sound similar and the direction is easy to reverse.
Fix: Top-down: economy, then industry, then company. Bottom-up: company first.
Saying technical analysis uses financial statements
Both methods are used to pick stocks, so they blur together.
Fix: Technical analysis uses price and volume data. Financial statements belong to fundamental analysis.
Forgetting preference dividend when computing EPS
Students use total net profit directly.
Fix: Deduct preference dividend first. Only profit for equity holders is used.
Using total equity with per-share price
Units get mixed under time pressure.
Fix: Keep both sides on the same basis: per share with per share, or total with total.

Worked examples

Example 1

A company has net profit of ₹50 crore and 10 crore equity shares. Its net worth is ₹200 crore and the market price is ₹150 per share. Find the P/E and P/B ratios.

Show the solution

EPS = ₹50 crore ÷ 10 crore shares = ₹5.
P/E = 150 ÷ 5 = 30.
Book value per share = ₹200 crore ÷ 10 crore = ₹20.
P/B = 150 ÷ 20 = 7.5.

Answer: P/E is 30 and P/B is 7.5.

Example 2

A share trades at ₹400. The company earns EPS of ₹25 and pays a dividend of ₹10 per share. Its net profit is ₹100 crore and shareholders' equity is ₹500 crore. Find the dividend yield, payout ratio and ROE.

Show the solution

Dividend yield = 10 ÷ 400 × 100 = 2.5%.
Payout ratio = 10 ÷ 25 × 100 = 40%.
ROE = 100 ÷ 500 × 100 = 20%.

Answer: Dividend yield 2.5%, payout ratio 40%, ROE 20%.

Exam tips

Expect direct ratio calculations and definition questions. Learn each formula with the price on top or not.
Read whether the dividend is given as a percentage of face value or in rupees per share.
Remember that ratios are compared with peers and industry, not judged alone.
Know the vocabulary: intrinsic value, relative valuation, top-down, bottom-up, support and resistance.
Under negative marking, skip a calculation only if you cannot set it up; most are one-step.

Practice questions from Investments

Equity Investments and Valuation: frequently asked questions

How do I calculate the PE ratio and PB ratio?

P/E is market price divided by earnings per share. P/B is market price divided by book value per share. Book value per share is net worth divided by the number of equity shares.

What is the difference between fundamental and technical analysis?

Fundamental analysis studies the business, financials, industry and economy to estimate intrinsic value. Technical analysis studies past price and volume patterns to judge trends and timing.

What is the difference between top-down and bottom-up investing?

Top-down starts with the economy, then selects industries and then companies. Bottom-up starts with individual companies and gives less weight to the wider economy or sector.

Is a high ROE always good?

A high ROE usually shows efficient use of shareholders' money. But it can be inflated by heavy borrowing, which shrinks equity and adds risk, so check it with other measures.