What is a Small-Cap Stock?
Small-Cap Stocks are, according to SEBI, listed companies that are ranked above 251 on the Indian stock exchanges (NSE & BSE) in terms of market capitalization. Amara Raja batteries, Alok Industries, and BSE Ltd are Small-cap stocks. In India, Nifty has a benchmark Small-cap Index known as Nifty Smallcap 50, which includes the top 50 most actively traded small-cap equities. Small-cap stocks are highly volatile and susceptible to market concerns.
The majority of these businesses are rather obscure and lack a substantial track record. Small-cap companies are companies in the early phases of development. These companies are smaller in size yet have excellent growth potential. The fact that they are relatively new, have little track record, and have a poor probability of long-term success makes them extremely risky investments. Consequently, small-cap stocks are extremely volatile with substantial growth potential.
Advantages of Small Cap Stocks
High growth potential
Small caps have historically outperformed large caps in terms of growth. Small-cap stocks have greater growth opportunities, but they may require capital to boost those prospects.
- Quality stocks at discounted prices
Larger companies may be overvalued because of significant demand, as individuals, institutional investors, etc. invest in them and drive the stock price higher. Many small-cap stocks, in contrast, are widely available at substantial discounts. The best small cap stocks make it easier for regular investors with minimal finances to invest in them. However, before buying a company’s shares, an investor must perform extensive research about the company.
Risk Related to Small Cap Stocks
Small-cap stocks are highly susceptible to market volatility as compared to mid-cap and large-cap stocks, which can be mitigated by portfolio diversification. Small-cap stocks are also less liquid or more difficult to sell because fewer investors are interested in these companies.
Investors must also devote sufficient time to researching small-cap stocks as an investment choice, and those with a higher risk tolerance can consider them.
What is Price To Book Ratio?
The Price-to-Book ratio or P/B ratio indicates the current price an investor is willing to pay for a stock. By comparing this to the market value of a stock, one may readily determine whether that stock’s value is overvalued, undervalued, or at its best price, and accordingly purchase, sell, or hold. A crucial financial ratio for investors, the P/B ratio compares a company’s net assets to its stock price in order to determine the company’s fair value. This is what makes it a significant and widely recognized ratio among high-end investors.
The P/B ratio, also known as the price-equity ratio, is a popular indicator used by investors to determine the relationship between a company’s market capitalization and the value of its assets. This serves as a crucial agency for brokers in order to gain enormous profits depending on the intrinsic worth of the stock. This is also helpful for analyzing a sector’s market trend.
Use the Price To Book Ratio To Analyze Stocks
Investors use the price-to-book ratio to determine whether a stock’s price is appropriate. Typically, a P/B ratio of one indicates that the stock price is equal to the company’s book value. In other words, the stock price is judged to be appropriately valued from a P/B perspective alone. A company with a high P/B ratio may be overvalued, whereas a company with a low P/B ratio may be undervalued.
However, the P/B ratio should be compared to other companies in the same industry. Some industries have a higher ratio than others. Therefore, it is essential to compare it to companies with comparable assets and liabilities.
A P/B ratio study is a crucial component of a value investing strategy. Such an approach presupposes that the market is somewhat inefficient and, as a result, that companies are trading for much less than their true value at times.
However, analyzing the PB ratio in isolation may be misleading at times.
List of Best Small Cap Stocks (as per Nifty Small-cap 50 Index)
|Amara Raja Batteries Ltd
|Amber Enterprises India Ltd
|Angel One Ltd.
|Anupam Rasayan India Ltd
|Apollo Tyres Ltd
|Automobile and Auto Components
|Bajaj Electrical Ltd
|Balaji Amines Ltd
Source: (Nifty SmallCap 50 Index)
Click here to find the best small-cap stocks on Kuvera.
- Is it prudent to use the P/B ratio for identifying quality stocks?
P/BV alone can be quite deceptive, but when paired with ROE, it can be a much more accurate indicator. Combining ROE and P/BV provides three insights. First, it provides the rate of return on your assets. Second, it indicates how efficiently a company can service its capital. Finally, it indicates the value that the market is willing to allocate to the net assets of the company, which is a factor of the return on assets.