If u were a stock what will be your price?

If u were a stock what will be your price?

Assume u r a software professional

presently u are earning 10 lac per annum.

Also, assume that ur annual expenses and liabilities are 8 lacs.

Your current net income is 2 lacs per annum.

One Mr.A is willing to pay 12 lacs for you.

Since after buying you, your earning will be Mr.A's earning,

he will recover his investment in you in 6 years.

(But he is not buying you to recover his investment, that too in as long a period as 6 years!
He has some other game plan.)

Your P/E ratio, i.e. Price to Earning ratio will also be 6 (=12/2).

Now, assume Mr.B, who is friend of Mr.A, happens to talk to you

and thereafter, is willing to give 20 lacs to purchase your rights from Mr.B!

Though your net earning is still 2 lacs pa,

your P/E ratio jumps from 6 to a whopping 10 !

Mr.A may think Mr.B is overpaying for you.

But he also wonders why Mr.B is overpaying despite being such a shrewd businessman.

However, Mr.B knows that you are qualified in a field which is going to be in great demand in the coming years.

In Mr.B's understanding, your net income is likely to jump 100% to 4 lacs pa.

That is expected to improve the P/E ratio from 6 to 5! (=20/4)

That way, Mr.B has made a good bargain.

Mr.A realises his mistake too late, otherwise he would have asked for a better price!

However, Mr.A knows that Mr.B is taking a risk,how-so-ever small, by paying your "future" value!

"Anything" can happen in the meantime!

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Now picture this,

your colleague, has similar qualification as yours

has same experience and in the same niche arena.

Mr.A, knowing your true "market" price

Now offers to buy your colleague for 14 lacs knowing very well that he is investing in an asset which will be readily bought for 20 lacs by someone like Mr.B.

Mr.A has successfully dug out an under-priced asset, your colleague!

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Any adverse news about you or your colleague or your profession can soar or crash you and your colleagues market price!

In stock market, all stocks are changing hands at their estimated or perceived "future value".

Higher the P/E value, higher the perceived "future value".

Different companies in the same sector can have different price depending upon their net income as well as future expectations.

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P/E value is one the main criterea to dig for undervalued assets.