How To Calculate Intrinsic Value UPDATED (Stock Market Investing) 

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My pleasure :)

Good exercise to do, though I'm not sure I understand 100 companies well enough to value them confidently! Thanks for the kind words, but I take no responsibility - you did the work ;)

Thanks! Not sure who I stole that from, but I like it too :)

​@@InvestingwithTomThat's a Munger quote

@@InvestingwithTomKeynes

Correct, John Maynard Keynes first said it @jeremynewell9903 @@siggiAg86

​@@siggiAg86Shakespeare

Very cool, thanks for sharing! I appreciate the kind words :)

Thanks!

No problem 👍

Not sure if plugin is the correct term or not, but just the 'stocks' feature built into excel

Thank you :)

Glad to hear. Thanks very much for the super thanks!

Thanks!

My pleasure!

The best margin of safety is the Growth itself.

Randomly assigning any %, let's say 50%, as MOS is not rational and kind of brainless idea. MOS shall be derived from the inferiority of the high debts or inferiority of the low economic ratio.

MOS, Margin of Safety, made simple: Entry Price = Intrinsic Value * (100% - MOS) Approach 1: MOS = D/E * 100% If: D/E = 1.00 MOS = 100% (equivalent to don't buy) D/E = 0.50 MOS = 50% D/E = 0.25 MOS = 25% D/E = 0.00 MOS = 0% or Approach 2: MOS = [1 - 1÷(1+D/E)] * 100% If: D/E = 1.00 MOS = (1-1÷(1+1.00))×100 = 50% D/E = 0.50 MOS = (1-1÷(1+0.50))×100 = 33.33% D/E = 0.25 MOS = (1-1÷(1+0.25))×100 = 20% D/E = 0 MOS = (1-1÷(1+0.00))×100 = 0% But Intrinsic Value = ?

Approach 3: MOS = ( 2÷ROIC/WACC - 1 ) * 100% If: ROIC/WACC = 1 (no economy spread) MOS = 100% (=don't buy) ROIC/WACC = 1.25 MOS = 60% ROIC/WACC = 1.50 MOS = 0.3333% ROIC/WACC = 2 MOS = 0% But Intrinsic Value = ?

Approach 3 is highly recommended. Approach 3 can still be refined I believe, but currently my brain is jammed.

Hey there, SBC is quite clearly added back to net income on the cash flow statement to arrive at cash from operations (which then flows through to FCF), so I still believe subtracting it as I've done in the video is the correct treatment. Thanks for watching/commenting :)

@@InvestingwithTom You're simply not understanding what he is saying. I think OP meant that SBC is already taken into account as an expense on the P&L statement thus giving a lower net income. So by deducting SBC off from Net income you are effectively subtracting its effect twice. Although tbh, just substracting SBC is a lazy way to take into account the effect of SBC, but SBC is indeed added back for a reason on the cash flow statement.

@@zanexie981 I see. Will try get my head around this over the weekend. Thanks for raising it!

Yeah, it's a good question and probably too complicated (for me at least!) for a spreadsheet. I've grown to appreciate how much capital allocation makes a difference though. I don't tend to do much maths on it personally, other than make sure I'm clear I understand management's plans in this area before going into an investment

@InvestingwithTom I haven't seen much literature on it either, which is quite surprising. This is the only theoretical factor that would account for the divergence between owner's earnings produced and actual return achieved. I may propose this as a research topic when I do my postgraduate studies.

My personal philosophy is that if I believe that any free cash flow that immediately isn't returned to the shareholders, should be used by the company to produce more cash in the future. If I don't believe the company will do that, I won't invest.

This may not be the best way to view it and it would depend on management competence but cashflow that isn’t returned to shareholders stays in the business and provided the ability to generate more future cashflow. This could be captured in the terminal value since increased cashflow will increase the terminal value. If you expect cash to be reinvested in the business, you can account for it in the growth rate too without getting too optimistic. You’re generally going to only give the business a high growth rate if the company is reinvesting capital and not distributing all of its free cashflow. Debt reduction can increase cashflow over time and strengthen the balance sheet which might demand a higher terminal value. Acquisitions can increase cashflow or be the driving force for your expected growth rate. Share buybacks would be the reverse of the share dilution that Tom has on his sheet. If buybacks are expected to outpace stock compensation, a negative number there would help with the calculation but this is hard to predict for most businesses, especially when you’re looking out 10 years.

Sure is ;)

The other adjustments you are talking about are included in the free Cash Flow formula. I don't know how Yahoo calculates Free Cash Flow. But the widely used formula is : EBIT(1- Tax%)+ Depreciation + Non Cash Items - Capex- Change in Working Capital. The PPE is covered in Capex and Receivables/ Payables are Covered under Working Capital.

Link in the description :)

Awesome, thank you!

SBC is a cost that isn't captured by FCF. Buybacks, dividends etc. are decisions about how the cash is then allocated. It has a real impact over time of course, but I don't really want to get into the business of how many shares the company might or might not be able to retire in a spreadsheet - too many moving parts. Approximately right > precisely wrong ;)

Take the average/ Median of last 3 year FCF.

He does not - answered this in a recent Q&A :)

Haha my bad ;)

LOL so you bought the golden goose Alibaba or the digital Warren buffets at Tencent. The you are lost 😂😂😂😂😂his circle of competence is the empty set.

If you use discounted cashflow year 1 $43 and use rule of 72. 1st 4 year $86 @ 15%+ next 6 years 43 @10% 86+43= 129 and use 10x = 1290 would that calculation work.

Same process - how much cash will they produce in future, discounted back to today. The challenge is having any level of confidence at all in your FCF estimates!

It starts at 00:00

No, I'm familiar with his results