Value Investing in Nepal?
As we know that there are several valuation methods that help to find the undervalue of stock such as Price to earning ratio (PE ratio) & Price to book value ratio (PBV). But the Graham Number is best to find the under value of stock. The Graham number is value that measures a fair price of stock’s fundamental by taking company EPS & Net-wort per share.
The Graham Number = Square Root of (15) x (1.5) x (EPS) x (Net worth per Share).
On this formula 15 is PE and 1.5 is PBV and both are fixed but in Nepal we know that overall industry of PE & PBV is higher than 15 & 1.5 hence the default formula is not effective for Nepal, so we have made some changes in Graham Number formula:
The Graham Number in Nepal = Square Root of (Ind. PE) x (Ind. PBV) x (EPS) x (Net worth per Share).
Commercial Bank Industry:
The Graham Number = Square Root of (22.3) x (2.75) x (EPS) x (Net worth per Share).
Development Bank Industry:
The Graham Number = Square Root of (21.65) x (2.31) x (EPS) x (Net worthper Share).
Example of Graham Number
For example, if the earning per share for a single share of company NMB is 21.71 , the Net worth per share is 145.32, the Graham number would be 440. ((22.3 * 2.75 *21.7 *145.32)= 440). Hence if the closing price/ LTP of NMB is greater than Graham Number is Overvalued or vice versa.