How to Calculate Book Value, P/B, and P/E Ratios for ITC Ltd – A Step-by-Step Guide (October 2024)

To calculate the book value per share (BVPS) for ITC Ltd, here’s the detailed breakdown:

Step 1: Understanding the Book Value Formula

Book Value per Share (BVPS) is calculated as:

\[BVPS = \frac{Shareholders’ Equity} {Total Number of Outstanding Shares}\]

Step 2: Gather the Required Data

• Shareholders’ Equity is the sum of the equity capital and reserves.
• Total Number of Outstanding Shares is based on the equity capital.

Step 3: Input Values for ITC Ltd (as of October 2024)

1. Shareholders’ Equity:
   • Equity Capital (as of Sep 2024): ₹1,251 crores.
   • Reserves (as of Sep 2024): ₹74,015 crores​.
   • Total Shareholders’ Equity = Equity Capital + Reserves = ₹1,251 + ₹74,015 = ₹75,266 crores.
2. Total Number of Outstanding Shares:
   • The equity capital indicates the nominal value of shares. Given ITC’s ₹1 face value per share, the total number of outstanding shares is 1,251 crores shares (since ₹1,251 crores of equity capital divided by ₹1 face value per share).

Step 4: Calculation of Book Value per Share

\[BVPS = \frac{75,266 crores} {1,251 crores} =₹60.15 \]

Verification with P/B Ratio

The Price-to-Book (P/B) ratio provides another way to verify:

• Given the P/B Ratio of 8.23 and the current market price:

\[Market Price = {BVPS} \times {P/B Ratio} \]

• Rearranging to find BVPS:

\[BVPS = \frac{Market Price} { 8.23} \]

Assuming a typical market price for ITC around October 2024 of ₹500 (a reasonable estimate):

\[BVPS \approx \frac{₹500 } { 8.23} \approx ₹60.75 \]

This closely aligns with our calculated BVPS of ₹60.15, considering market fluctuations.

Thus, the estimated book value for ITC Ltd is approximately ₹60.

Another method to calculate the Book Value per Share (BVPS)

Another method to calculate the Book Value per Share (BVPS) involves using the formula based on the company’s total assets and liabilities, instead of directly using shareholders’ equity. Here’s the process:

Step 1: Understanding the Adjusted Book Value Formula

Book Value can also be derived using:

\[{Total Assets} – {Total Liabilities} = {Shareholders’ Equity} \]

Step 2: Gather the Data

• Total Assets and Total Liabilities from the balance sheet are used to calculate Shareholders’ Equity.
• Use the equity capital to find the total outstanding shares.

Step 3: Input Values for ITC Ltd (as of September 2024)

1. Total Assets: ₹94,071 crores​.
2. Total Liabilities: ₹18,501 crores​.
3. Equity Capital (as per previous calculation): ₹1,251 crores.

Step 4: Calculation of Shareholders’ Equity

\[{Shareholders’ Equity} = 94,071 – 18,501 = ₹75,570crores\]

Step 5: Calculation of Book Value per Share (BVPS)

1. Total Outstanding Shares (calculated from the Equity Capital):
   • Since the face value is ₹1, the total shares = 1,251 crores.
2. BVPS:

\[BVPS = \frac{75,570 crores}{1,251 crores} = ₹60.40 \]

This method confirms a similar range of ₹60.40, slightly differing due to rounding or minor adjustments in total liabilities or asset estimation.

Therefore, using both methods, the estimated book value per share for ITC Ltd is consistent, around ₹60 to ₹61.

The Price-to-Book (P/B) ratio is a financial metric that compares a company’s market value to its book value. Here’s the formula and the process to calculate it:

P/B Ratio Formula

\[P/B Ratio = \frac{Market Price per Share}{Book Value per Share (BVPS)} \]

Step-by-Step Calculation

Find the Market Price per Share: This is the current price at which the company’s stock is trading in the stock market. You can get this from financial websites, stock exchanges, or trading platforms.

Determine the Book Value per Share (BVPS): This can be calculated using:

\[BVPS = \frac{Shareholders’ Equity}{Total Number of Outstanding Shares} \]

Shareholders’ Equity = Total Assets – Total Liabilities.

Total Number of Outstanding Shares can be found in the company’s balance sheet.

Apply the Formula:

Divide the market price per share by the calculated BVPS to get the P/B ratio.

Example Calculation for ITC Ltd

Let’s say we have:

• Market Price of ITC Share ≈ ₹500.
• Book Value per Share (BVPS) = ₹60 (as calculated earlier).

\[P/B Ratio = \frac{500}{60} ≈ 8.33 \]

Interpretation of P/B Ratio

• A P/B ratio of 1 indicates that the market price equals the book value.
• A P/B ratio greater than 1 means the stock is trading above its book value, implying that investors are willing to pay a premium for the company’s assets.
• A P/B ratio less than 1 suggests the stock might be undervalued.

Why Use P/B Ratio?

• It’s particularly useful for valuing companies with substantial assets, like financial firms or companies with significant real estate.
• A high P/B ratio can signal high expectations for future growth, while a low P/B ratio might indicate potential undervaluation or issues with the company’s fundamentals.

This is how the P/B ratio provides a snapshot of market perception regarding a company’s asset value.

The Price-to-Earnings (P/E) ratio is a common valuation metric that compares a company’s current share price to its earnings per share (EPS). It helps investors assess how much they are willing to pay for a company’s earnings.

P/E Ratio Formula

\[P/E Ratio = \frac{Market Price per Share}{Earnings per Share (EPS)}\]

Step-by-Step Calculation

Find the Market Price per Share: This is the current trading price of the company’s stock. You can get this from stock market platforms or financial websites.

Determine the Earnings per Share (EPS):

EPS is calculated as:

\[EPS= \frac{Net Profit}{Total Number of Outstanding Shares} \]

Net Profit is the company’s profit after tax and other expenses. This figure is available in the company’s income statement.

Total Number of Outstanding Shares is the total shares issued by the company, found in the balance sheet.

Apply the Formula:

Divide the market price per share by the calculated EPS to find the P/E ratio.

Example Calculation for a Hypothetical Company

Suppose we have:

• Market Price per Share = ₹500.
• Net Profit = ₹10,000 crores.
• Total Outstanding Shares = 1,000 crores.

Step 1: Calculate EPS:

\[EPS = \frac{10,000 crores}{1,000 crores} = ₹10\]

Step 2: Calculate the P/E Ratio:

\[P/E Ratio = \frac{500}{10} = 50 \]

Interpretation of P/E Ratio

• A high P/E ratio may indicate that investors expect high growth in the future, suggesting the stock might be overvalued.
• A low P/E ratio may suggest that the stock is undervalued or that the company’s future prospects aren’t considered strong by the market.

Why Use the P/E Ratio?

• It is widely used because it provides a straightforward way to compare valuations across companies within the same industry.
• A lower P/E could imply a potential buying opportunity, while a higher P/E might suggest caution.

Types of P/E Ratios

1. Trailing P/E: Uses past 12 months of earnings (historical EPS).
2. Forward P/E: Uses projected future earnings to estimate the ratio.

This metric gives insight into market sentiment and how a company’s earnings are valued relative to its stock price.

To calculate the P/E (Price-to-Earnings) ratio for ITC Ltd, you need the current market price per share and the earnings per share (EPS). Here’s a breakdown based on the latest data:

Step-by-Step Calculation

1. Market Price per Share: As of mid-October 2024, ITC Ltd’s market price is around ₹492.15.
2. Earnings per Share (EPS): The trailing twelve months (TTM) EPS for ITC Ltd is ₹16.39.

Formula for P/E Ratio

\[P/E Ratio = \frac{Market Price per Share}{Earnings per Share (EPS)}\]

Calculation

\[P/E Ratio = \frac{492.15}{16.39} ≈ 30.03 \]

Therefore, ITC Ltd’s P/E ratio as of October 2024 is approximately 30.03. This indicates that investors are willing to pay about 30 times the earnings for each share of ITC Ltd, reflecting market expectations for the company’s future growth and profitability.