X-A chapters / Module 3: Investment Products

Chapter 8. Investing in Stocks

Equity as an investment: diversification and risks, equity research, valuation methods and relative multiples, technical analysis and qualitative evaluation.

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Total watch time 39 min · Hindi audio

Key topics

Diversification and types of equity risk
Equity research and top-down EIC analysis
Business cycle, sector rotation and industry life cycle
DCF, asset-based valuation and relative multiples (P/E, P/BV, PEG, EV, EVA)
Technical analysis: trend lines, moving averages, Bollinger Bands

Chapter test

25 multiple-choice questions with explanations. Score 60% or more to complete this chapter.

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Formulas in this chapter (9)

Full formula sheet →

Earnings per share (EPS)

Ch 8.5

EPS = Profit after tax ÷ Number of outstanding equity shares

Example →: PAT ₹100 crore, 20 crore shares → EPS ₹5.
Trap →: Use profit after tax and outstanding shares, not profit before tax or authorised shares.

P/E ratio

Ch 8.5

P/E = Market price per share ÷ EPS

Example →: Price ₹100, EPS ₹5 → P/E 20. With an industry average of 22, the stock looks relatively cheap.
Trap →: Trailing P/E uses the last 4 quarters' actual EPS; forward P/E uses the next 4 quarters' estimates. Questions mix the two.

P/B ratio (price to book)

Ch 8.5

P/B = Market price per share ÷ Book value per share · Book value per share = Shareholders' equity ÷ Shares outstanding

Example →: Price ₹200, book value ₹100 a share → P/B 2. Widely used for banks and financials.
Trap →: 'A low P/B always means undervalued' is wrong; it can reflect impaired or overstated book assets.

P/S ratio (price to sales)

Ch 8.5

P/S = Market capitalisation ÷ Trailing 12-month sales

Example →: Useful for loss-making companies; sales are harder to manipulate than earnings.
Trap →: For a heavily leveraged firm, use EV/Sales instead, because P/S ignores debt.

PEG ratio

Ch 8.5

PEG = P/E ÷ Expected annual EPS growth rate (as a number, e.g. 25 for 25%)

Example →: P/E 20, expected growth 25% → PEG = 20 ÷ 25 = 0.8, undervalued relative to growth.
Trap →: PEG below 1 = undervalued, 1 = fair, above 1 = overvalued. Questions reverse this.

Enterprise value (EV)

Ch 8.5

EV = Market cap + Market value of debt − Excess cash and equivalents

Example →: Market cap ₹800 crore + debt ₹300 crore − cash ₹50 crore = ₹1,050 crore.
Trap →: Cash is subtracted, not added. Use the market value of debt where it's given.

Dividend yield

Ch 8.5

Dividend yield = Dividend per share ÷ Market price per share × 100

Example →: Price ₹40, dividend ₹2 a share → 5%.
Trap →: Use the current market price, not the face value. 'Dividend of 50% on face value' isn't the yield.

Earnings yield

Ch 8.5

Earnings yield = EPS ÷ Market price × 100 = 1 ÷ (P/E)

Example →: EPS ₹25, price ₹500 → 5% (the inverse of a P/E of 20).
Trap →: Don't confuse it with dividend yield; earnings yield uses EPS, not DPS.

Market capitalisation

Ch 8.5

Market cap = Current market price × Total outstanding shares

Example →: Price ₹500 × 10 crore shares = ₹5,000 crore.
Trap →: Use the market price, not the face value, and total outstanding shares.