I was discussing with one friend whether to buy HEG or Graphite India. His immediate response was HEG priced at more than ₹3,000 is costly whereas Graphite India at ₹700 levels is relatively cheaper. This is a very common misconception with a lot of people and they try to avoid a high priced share.
This a gross misconception because of which naive investors end up buying low priced and low-quality companies.
I will try to explain it with an analogy of Pizza.
Suppose I purchase two quantities of the same pizza. That pizza can be cut into 6 pieces and 10 pieces or some other variants.
Does that make the Pizza cut into 6 pieces costlier than the one cut into 10 pieces? The obvious answer is a big NO.
Same Pizza with 6 Slices
Same Pizza with 10 Slices
Then, Why do we make such discrimination with High priced stocks in the market?
Now, let’s apply the same analogy to the stock market where:
Price of Pizza= Market Capitalization of the company
Number of slices= Number of shares of the company (Not the share prices)
Let’s take two companies identical A & B companies with a market value of Rs 1000 Cr.
Company A with Market Capitalization= ₹1000cr
Company B with Market Capitalization= ₹1000cr
Does issuing more shares make your company's value go down? Answer is a big No. It has nothing to do with the value of the company.
As I started with the comparison between the two graphite electrode stocks which I closely track, I have put up a comparison between the two companies below.
You can clearly see in the comparison that although the share price of HEG is higher than Graphite India, but the market capitalization(Market Value) of HEG Lags Graphite India.
The best way to compare would be to compare the ratios. The two most important ratios that I use:
Price to Earning Ratio-> HEG lags Graphite
Market cap to Sales Ratio-> HEG lags Graphite
Implies that HEG is undervalued than Graphite India.
In addition to these, you should also look at the profitability, management integrity etc
Current Share Price=3910
Market Capitalization= Rs 15,600cr
Sales= Rs 2758cr
Price to Earning Ratio=14.47
Market cap to Sales Ratio=5.66
Current Share Price= Rs 992
Market Capitalization= Rs 19,400 cr
Sales= Rs 2958cr
Price to Earning Ratio=21.24
Market cap to Sales Ratio=6.56
The high price of HEG can be explained by the number of Shares issued.
No of shares issued by HEG(No of Pizza Slices according to our analogy)= 3,99,59,142
No of shares issued by Graphite India(No of Pizza Slices according to our analogy)= 19,53,75,594
Let’s do the math again:
HEG Share price= Market Capitalization/ No of shares=(15,600/3.99)=Rs 3900
Graphite India Share price= Market Capitalization/ No of shares=(19,400/19.5)=Rs 990
I hope this clears all doubts.
In a nutshell, no investment decision should be taken on the basis of just the share price.
I am putting up a list of most highly priced stocks for your reference.
As you can see, there are multiple Tiny sized companies(Less than 500 cr) and again the share price is more than ₹10,000/-.
Hope the article helps you.
As on 9th July 2018. Highly priced shares in India