What you will learn in this lesson
So far you have learned what intrinsic value means and where to find a company's financial statements. This lesson goes one step further and opens up three practical equity valuation tools: net asset value, the forward price to earnings ratio, and the price to sales ratio. For each tool you will see three things: which kind of company it was built for, how it is calculated, and above all exactly where it breaks down. In valuation, knowing the limits of a tool matters just as much as knowing its formula. This lesson gives you a way to judge, not a recommendation to buy or sell.
Definitions
Net asset value (NAV): the current market value of all of a company's assets minus all of its liabilities. Dividing that by the number of shares gives NAV per share. The ratio of the board price to NAV per share is called P/NAV; when it is below one, the share is said to trade at a discount to NAV.
Forward earnings per share (forward EPS): an estimate of earnings per share for the period ahead (usually the next twelve months), not earnings already realised. The emphasis belongs on the word estimate.
Forward price to earnings ratio (forward P/E): the share price divided by forward earnings per share. Unlike the backward looking P/E, whose denominator is a realised number, this ratio's denominator is a forecast.
Price to sales ratio (P/S): the company's market capitalisation divided by annual operating revenue (sales). This ratio ignores profit entirely and measures only the size of sales against the price.
Net profit margin: net profit divided by sales. It is the bridge that connects sales to profit, and without it P/S is not fully meaningful.
Risk free rate: the return available without accepting default risk. In Iran's capital market, the yield to maturity on Islamic treasury bills (akhza) is normally treated as its proxy.
Tool one: net asset value
This tool was built for asset based companies: investment companies and holdings that do not manufacture anything themselves and whose value is roughly equal to the current value of what they hold. The mechanism has three steps: add up the current value of every asset (listed shares at the board price, unlisted shares and property by appraisal), subtract all liabilities, and divide the result by the number of shares.
Where it breaks down. NAV's weakness hides inside the phrase current value. For listed shares the daily price is transparent and observable, but for a property, a half finished project or shares in an unlisted company, current value is itself an appraiser's estimate. In other words NAV, which looks precise and accountant like, can be as soft and as movable as any other estimate. It has three further failure points: the cost of selling and the tax on liquidating assets are not reflected in it, so NAV is in practice an optimistic ceiling; a discount to NAV can persist for years, so a discount alone is not the same as cheap; and because a large part of the assets are themselves listed shares, NAV moves with the market and looks largest of all at the market's peak.
Tool two: the forward price to earnings ratio
This tool was built for earnings based companies: manufacturers whose value comes from the stream of profit they generate. Its logic is simple. You estimate the next twelve months of profit, divide the price by it, and compare the result with industry peers and with the company's own history. Its advantage over the backward looking P/E is clear: today's price looks at the company's future, not at a year that has already closed.
Where it breaks down. The first and biggest failure sits in the denominator: forward earnings are an estimate, not a recorded fact. Whatever number you put there changes the output, and two honest analysts can build two completely different forward P/E ratios for the same share. The second failure is peak cycle earnings: in commodity driven industries, exactly when global prices are at their highest and profit is setting records, the forward P/E shows its lowest reading and the share looks cheap, yet that is the moment of greatest danger, because the denominator is standing at a peak and has nowhere to go but down. The third failure belongs to inflationary economies: with high inflation, nominal profit grows without any real improvement in performance, so do not mistake nominal profit growth for real growth. The fourth failure is one off income: profit that came from selling an asset or from an asset revaluation inflates the denominator for one period and pushes the forward P/E down artificially.
Tool three: the price to sales ratio
P/S was built for the situations where the other two tools stop working: a company that is loss making, or whose profit is so volatile that the P/E denominator becomes meaningless. Unlike profit, sales are rarely negative and are less movable through accounting choices, which makes them a steadier anchor during loss making periods and when comparing companies within one industry.
Where it breaks down. The main failure is built into its definition: sales are not profit. A company with enormous sales and a margin near zero shows an attractive P/S while creating no value at all for shareholders. The second failure is that it ignores debt: two companies with identical sales, one debt free and one drowning in debt, have exactly the same P/S even though their equity is worth wildly different amounts. The third failure is inflation again, which makes nominal sales look larger year after year. The fourth failure is native to Iran's economy: in industries whose selling prices are set administratively, high sales do not necessarily translate into profit, because the company does not control the price of its own product. The practical rule is never to read P/S alone, and always to put net profit margin next to it.
A worked example: one company, three answers
Every number in this example is hypothetical and for teaching only. Suppose company A has 10 billion shares and each share trades on the board at 2,000 tomans, so its market capitalisation is 20,000 billion tomans. Your estimate for next year: sales of 30,000 billion tomans and net profit of 3,000 billion tomans (a net margin of 10 percent). The current value of its assets is 35,000 billion tomans and its liabilities are 10,000 billion tomans.
Now run all three tools on this one company. Forward earnings per share are 3,000 billion divided by 10 billion, that is 300 tomans, so the forward P/E is 2,000 divided by 300, about 6.7. P/S is 20,000 billion divided by 30,000 billion, that is 0.67. And NAV is 35,000 minus 10,000, that is 25,000 billion tomans, which divided by 10 billion shares gives 2,500 tomans per share, meaning the share trades at a P/NAV of 0.8, a 20 percent discount to NAV.
Three tools, three different pictures: through the NAV lens the share sits 20 percent below the value of its assets, through the P/S lens its ratio is below one and looks cheap at first glance, and through the forward P/E lens you must weigh 6.7 against peers and against the risk free rate before deciding whether it is cheap or expensive. That is the central point of this lesson: when three tools give three answers, the disagreement is itself information. You should ask which tool fits the nature of this company and why the other two paint a different picture.
In Iran's market
Three local specifics shape how these three tools work on the Tehran Stock Exchange.
The raw material for NAV is on Codal. Listed investment companies publish a report called the portfolio status report (sourat vaziat portfoy) for one month periods on the Codal system (codal.ir), the comprehensive issuer disclosure system operated under the Securities and Exchange Organization. That report lists the portfolio's holdings with their cost and their market value, and that document is the basis on which any analyst calculates NAV. Access to it is free.
The risk free rate is the hidden anchor beneath every judgement about P/E. A price to earnings ratio is meaningless in a vacuum and has to be weighed against the risk free alternative return. According to data from the Economic and Risk Analysis Department of the Securities and Exchange Organization, the yield to maturity on Islamic treasury bills in the week ending Wednesday, 29 July 2026 (7 Mordad 1405) was 39.58 percent. Mathematically, a yield of 39.58 percent is equivalent to a price to earnings ratio of about 2.5. Put simply, when such a return is available without default risk, an investor demands a higher return for accepting equity risk, and this is what structurally keeps price to earnings ratios on the Tehran Stock Exchange below those of global markets. But do not miss one important qualification: corporate profits grow with inflation while a bond's coupon is fixed, so this comparison is an anchor, not a verdict.
The exchange rate moves the denominator. In export driven companies, a change in the exchange rate directly raises or lowers rial profit and therefore shifts the forward P/E without anything in the company's operations having changed. We will open that subject up in detail in the next lesson.
Common mistakes
"So which method is the right one?" None of them on its own. Each tool was built for a particular economic structure; judging a holding company only by P/E, or a highly profitable manufacturer only by NAV, pushes both tools outside the job they know how to do.
"A discount to NAV means the share is cheap." Not necessarily. A discount only becomes a gain when it closes, and on the Tehran Stock Exchange the discount on investment companies can persist for years. A discount is an observation, not a promise.
"A low forward P/E means opportunity." Sometimes it means the market saw the coming fall in profit before you did. That is what is known as a value trap.
"The output of a valuation is a number." The correct output is a range, together with the assumptions that produced it. Instead of "this share is worth 4,000 tomans", a professional analyst says "on these assumptions, between 3,500 and 4,500 tomans, and if a key assumption changes, so does the range".
Summary
Equity valuation is not about choosing a formula, it is about choosing the tool that matches the structure of the company. NAV works for an asset based company and breaks down where the current value of the assets is itself an estimate. Forward P/E works for an earnings based company and breaks down where profit sits at the peak of the cycle or is contaminated by one off items. P/S works where there is no profit to divide by, and breaks down when you fail to look at margin and debt. When you run all three on one company and the answers differ, do not throw that disagreement away; it is exactly the point where real analysis begins.
In the previous lesson, Trading Fees and Taxes, we saw how much leaves your pocket before any profit arrives. To review the foundations of this lesson, see Fundamental Analysis and Intrinsic Value and the guide to reading Codal financial statements. The full set of lessons is available at Sahmino Academy.
