When analysing a stock, we often focus on net profit. It's a common belief that good profits indicate a good company. But what if there's a method to judge a stock's price without solely relying on net profit? In this article, we'll explore a different approach to determine whether a stock is undervalued or overvalued by using net sales per share.

Understanding the Method

The concept of net sales per share revolves around calculating the revenue a company makes per share. This method doesn't require charts or in-depth company information. Instead, it uses a straightforward formula to derive the net sales per share.

The Formula

To calculate the net sales per share, divide the total sales by the number of shares. This formula applies to non-banking companies that do not engage in financial work.

Net Sales Per Share = Total Sales / Number of Shares

Why Focus on Net Sales?

While net profit is crucial, it doesn't always tell the full story. Sometimes, a company's sales might be increasing, but profits might be decreasing due to factors like opening new branches or capital expenditures. These factors often reduce profit margins temporarily, indicating potential future growth.

Live Examples

Let's understand this method better with real-life examples.

Tata Steel:

• Total Sales: Rs 233,445 crore

• Number of Shares: 1248 crore

• Net Sales Per Share: Rs 187

• Current Market Price: Rs 128

Based on its sales, Tata Steel appears undervalued.

LIC:

• Total Sales: Rs 1273 crore

• Number of Shares: Data not provided

• Market Price: Rs 976

LIC's market price is below its real value, indicating it might be undervalued.

Common Mistakes and Key Insights

One common mistake investors make is trading based solely on net sales per share. It's essential to consider other factors as well. For example, Rajesh Export shows a net sales per share value of Rs 10328, but its market price is Rs 303, indicating significant undervaluation.

When the market price falls below the real value, big investors like DIIs, FIIs, and mutual fund houses recognize the undervaluation and make strategic investments.

Conclusion

Net sales per share is a valuable tool for stock analysis. It helps identify undervalued or overvalued stocks based on sales. However, it's crucial to use this method in conjunction with other analysis techniques. By understanding and applying this method, investors can make more informed decisions and potentially achieve better returns.