How fair value is calculated

Fair value on DocStoX is a deterministic estimate computed from a company's own reported financials. It follows a published, repeatable method, the same way every time for the same inputs. It is not an AI opinion, and it is not a price target.

Value = book value + excess returns#

The core method is residual income (also called excess-return valuation): a company is worth the capital already invested in it (its book value) plus the value of the profit it can earn above its cost of capital, for as long as it can sustain that edge.

• Earning exactly its cost of capital, a business is worth its book value (price-to-book near 1).
• Earning more than its cost of capital justifies a premium to book.
• Earning less means it should trade at a discount.

This is deliberately not a simple earnings multiple. A P/E-only model misprices banks, NBFCs, brokers and holding companies, whose value sits on the balance sheet rather than in one year's earnings, and it misprices quality compounders, whose worth comes from returns persisting for years. The residual-income model handles both.

The four moving parts#

1. Residual income. Fair value = book value + the present value of every future year's profit earned above the cost of equity. There is no inflated terminal growth: once returns fade to the cost of capital, extra growth stops adding value.
2. Economic moat. How durably a business out-earns its cost of capital sets how long that excess-return runway lasts, roughly 2 years with no moat, 10 years with a narrow one, 20 years with a wide one. This is what lets a genuine compounder justify a high fair value.
3. Cost of equity. The return investors reasonably require, used to discount future value. DocStoX builds this up from an Indian market base rate plus a risk premium for leverage and cyclicality, rather than reading it off a noisy stock-price beta.
4. Uncertainty, mapped to stars. How wide the range of plausible outcomes is sets the margin of safety a rating requires. A riskier business must trade at a deeper discount before it earns a high star rating.

Multiple models, blended#

Several independent valuation methods run against a company's reported financials at once. DocStoX drops any method whose inputs look unreliable for that company, then blends the rest, weighted by how trustworthy each one is. Banks, NBFCs, brokers and holding companies are valued on the excess-return-over-book-value track specifically, since cash-flow and earnings-multiple models break down where debt is the raw material of the business rather than financing.

Where the methods disagree, the resulting bear, base and bull range widens to show that disagreement rather than presenting one confident number.

From fair value to a star rating#

DocStoX compares the current price to fair value, then applies a margin of safety scaled by how uncertain the estimate is. A bigger discount to fair value earns a higher rating; a premium earns a low one. A price close to fair value, roughly within 10-15%, rates the middle of the scale: fairly valued. A weak-quality business is also capped from the top ratings even when it looks cheap on price alone.

When fair value is withheld#

DocStoX publishes a fair value only for the categories of company where the method has been measured to hold up, and shows "Fair value not available" everywhere else, rather than a number it does not trust. This is deliberate: several valuation approaches can disagree sharply on a business that does not fit any of them cleanly, such as a loss-making company, an insurer, a real-estate business, or a conglomerate whose value sits mostly in stakes it holds, and publishing a confident-looking number there would be misleading regardless of how it is labelled. A "not available" stock page also shows no star rating, since a rating next to no fair value would contradict itself.

What it is, and is not#

Every input comes from the company's own reported financials; a missing input drops a method rather than inventing a number to fill it. It is a well-grounded, inspectable estimate, not a guarantee and not a promise about the future price. DocStoX also shows sector-relative valuation multiples and analyst targets alongside it as independent cross-checks.

The full, illustrated version of this page, including the star-rating table by uncertainty band, is at How DocStoX estimates fair value. For how to read the number on a stock page, see Fair value and valuation.