One day I was searching online intrinsic value calculator on web. I was surprised to see how less is available on the internet about intrinsic value calculator. To be frank, I could not find even one authentic calculator that I could use to estimate intrinsic value of my stocks.
This is only one side of story. On other side, it is also important to understand that though coding an intrinsic value calculator is not tough, still authentic calculators are not available online, why? To develop an intrinsic value calculator a combination of financial know how and programming skill is necessary.
This is a rare combination and hence intrinsic value calculators are rare to find on internet. Finance people do not know programming skills. Programmers may not have the financial know-how. People who has both these skills are not many. Moreover, people who has this skill may not be willing to part with this knowledge, leave aside publishing it on internet.
Online, there are plethora of financial calculators available. But why only intrinsic value calculator is so rare? The root cause of this scarcity is the concept of intrinsic value itself. It is a fact that the concept of precise intrinsic value calculation requires exception financial skills. Probably only handful people on this earth has this skill.
One such personality known to us is Warren Buffett. Common investors does not have investing abilities like Buffett, hence precise calculation of intrinsic value becomes difficult. But even rough estimation of intrinsic value can be a very valuable information for stock investors. How common men like us can estimate intrinsic value of stocks?
Intrinsic Value Calculator
|Market Price (Rs.)|
|Risk Free Rate (R) % [Google for 10Y Govt.Bond Rate]|
|Expected Risk Premium (Rp) % [In India safest will be 5% above Risk Free Rate]|
|Stock Beta (B) [Search for it in Reuters.com]|
|Market Value of Equity (E) Rs.Cr. [Look for companies balance sheet in moneycontrol.com]|
|Market Value of Debt (D) Rs.Cr.[Look for companies balance sheet in moneycontrol.com]|
|Number of Shares Outstanding (S) [Lakhs-0.1Million] Nos.[Look for companies P/L in moneycontrol.com]|
|Free Cash Flow of Last FY (F) Rs.Cr.|
|Free Cash Flow Growth for next 5 Yrs (gf) %|
|Terminal Growth Rate beyond 5th Year (Tg) %|
|WACC (W) %|
|INTRINSIC VALUE PER SHARE (I/S)|
|RATIO OF MARKET PRICE & INTRINSIC VALUE PER SHARE|
We have developed this online intrinsic value calculator that can be used to approximately estimate intrinsic value of stocks. The concept used to calculate intrinsic value is very similar to DCF business valuation model . We have tweaked the DCF model a little bit to make it user friendly for all. Though this calculator is self-explanatory, but for first timers I will explain few terminologies used in the calculator.
Risk Free Rate
The risk free rate is easily available on internet. On can google for the prevailing rate for 10 year government bond. Present risk free rate is 7.77%
Expected Risk Premium
When one invests in equity, the expectation of returns are higher. The factor by which equity yields returns over and above risk free rate is called as risk premium. Suppose SENSEX averaged return of 12% over last 5 years. Considering risk free rate as 7.77%, risk premium will be 12%-7.77% = 4.23%
Some stocks are more volatile than others. Some stocks are so stable that, even during market crash when SENSEX is tumbling down, these stocks show great resistance. Such stable stocks have beta less than one. Stocks which are more volatile (compared to index) will have beta more than one. The higher is the beta more volatile is the stock. Stock beta value can be easily obtained online from websites like Reuters etc.
Market Value of Equity
This value is readily available in companies balance sheets. Market value of equity is equal to share capital plus accumulated reserves. One cash also find this information on Yahoo Finance, Bloomberg, Moneycontrol etc.
Market Value of Debt
This value is also readily available in companies balance sheets (long term debt). One cash also find this information on Yahoo Finance, Bloomberg, Moneycontrol etc.
Number of Shares Outstanding in Market
This value is available in companies financial reports. In moneycontrol.com, it is available in profit and loss accounts.
Free Cash Flow
Calculation of right free cash flow is essential for correct estimation of intrinsic value of stocks. Free cash flow is not same as net profit minus dividends. Free cash is that cash that company can utilize to enhance shareholders valve. High free cash flow year after year gives a company a competitive edge over its competitors.
|Cost of Goods Sold (Rs.Cr.)|
|Income Tax Expense (Rs.Cr.)|
|Current Asset-Last Year (Rs.Cr.)|
|Current Liability-Last Year (Rs.Cr.)|
|Current Asset-Current Year (Rs.Cr.)|
|Current Liability-Current Year (Rs.Cr.)|
|Capital Expenditure Rs.Cr.|
|Free Cash FLow (FCF) Rs.Cr.|
Free Cash Flow Growth Rate for next 5 years
A reliable way to estimate free cash flow growth rate is by calculating free cash flow of last five years. When one know free cash flow of last five years, calculating free ash flow growth for those 5 years is simple. For simplicity, we can consider same growth rate for next 5 years in future.
Terminal Growth Rate beyond 5th year
In order to calculate ALL future free cash flows, it is not enough to estimate free cash flow of only next 5 years. Terminal value helps to estimate ALL free cash flow from 6th year till end of life of company. For simplicity sake, we can assume terminal growth rate of 3% per annum.
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Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.