Valuing a company is a crucial offshoot of investment research. If you ever get to see an analyst's Excel sheet, you will find it filled with abstruse calculations that he has done to arrive at the right value of the stock. If you are already shaking your head and wondering what's the need for all that, given the classic P/E, P/B and PEG measures, the table below might open up your eyes to a different reality.
It lists some companies with their investments in other listed companies. The remarkable thing about these companies is that their investments are at least 50 per cent of their own market sizes. At first sight, it appears that there is no relation between the market value of the company and its investments. Is this an anomaly or is there more to it? The problem may lie not with the investment but the 'investors', i.e., the companies that have made these investments.
It could be that these investor companies' core operations are suffering or they are highly indebted or they have other loss-making subsidiaries. As one can observe, in many cases they are the parent companies and may never sell these investments. Hence, they are being valued at a significant discount, what is also called the 'holding-company discount' in stock-market lingo. Another reason could be that the investments made by these companies have grown at a faster rate than their own market caps.
On the bright side, these investments are likely to give protection against a downside in the investor company.
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