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Topic: Intrinsic value of a stock

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Kishor
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Posted: 26/Apr/2009 at 12:28pm

Hi All

I understand that the Intrinsic value of a stock is tied to the Cash Flow of the company.

But How you all calulate the future cash flow?I think it is operating CF that will be considered.Is it a good idea to take the operating CF from the Annual reports as a starting point.

If this is ok how to project it to future?It is easy to project the Future sales but i feel it is bit tricky to project Cost and arrive at Operating Cash flow.

Am I missing something or is there a better way to calculate the Cash Flow?

regards

Kishor

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basant
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Posted: 26/Apr/2009 at 4:30pm

Addif WC has increased deduct it and vice versa .add back non cash exp like dep and make adjustments for changes in WC and then deduct the increase in fixed assets.

What you will be left with is free cash flow.

'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

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9StockPortfolio
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Posted: 26/Apr/2009 at 10:51am

Originally posted by Kishor

Hi All

I understand that the Intrinsic value of a stock is tied to the Cash Flow of the company.

But How you all calulate the future cash flow?I think it is operating CF that will be considered.Is it a good idea to take the operating CF from the Annual reports as a starting point.

If this is ok how to project it to future?It is easy to project the Future sales but i feel it is bit tricky to project Cost and arrive at Operating Cash flow.

Am I missing something or is there a better way to calculate the Cash Flow?

regards

Kishor

Kishore
Read the last para above.

Buffet talks about earnings. Not operating CF. How much profit or earning you can take out of the business for a given period is what estimating earnings. You should be pessimistic about fixing the earning growth rate. I take 8.5 to 10%. You should be optimistic about discounting future earnings. I want 12% to 14% returns so my Discount rate would be 12%.

So finally i would project that lets say Thermax would increase it's earnings 8.5% every year and I will discount that by 12% back to todays price. This overall brings intrinsic value very low compared to the CMP. if you decide to buy at what you have calculated. then you will get wonderfull business & cheap prices.

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9StockPortfolio
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Posted: 26/Apr/2009 at 10:55am

Originally posted by basant

Addif WC has increased deduct it and vice versa .add back non cash exp like dep and make adjustments for changes in WC and then deduct the increase in fixed assets.

What you will be left with is free cash flow.

Or this can be

FCF = Net profit + Depriciation - Capital Expenditure. You may call it as Owners Earnings as well.

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basant
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Posted: 26/Apr/2009 at 11:38am

You need to adjust for WC changes as well because that is cash invested or thrown out from business.

'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

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Kishor
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Posted: 27/Apr/2009 at 1:06pm

Hi Basant

Nice to see your reply.

Future Cash earnings to an extent can be estimated using the expected growth rates.

But i feel it is extremely difficult to forsee the future WC changes and Capital exp company is going to incurr.

Hi 9stock portfolio

If i am not wrong the discount rate should be the cost of capital.

regards

Kishor

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basant
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Posted: 27/Apr/2009 at 1:22pm

Absolutely true., What we do is take a percentage of current year sales on WC and assume it to remain same.

But there are a lot opf assumptions in cash flow analyusis that is why I like to focus on RoCE!

'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

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9StockPortfolio
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Posts: 479

Posted: 27/Apr/2009 at 2:15pm

Originally posted by Kishor

Hi Basant

Nice to see your reply.

Future Cash earnings to an extent can be estimated using the expected growth rates.

But i feel it is extremely difficult to forsee the future WC changes and Capital exp company is going to incurr.

Hi 9stock portfolio

If i am not wrong the discount rate should be the cost of capital.

regards

Kishor

I am not sure how do you interpret Cost of Capital.

My definition of Discount rate is, the rate at which you see your today's money after some period. That is Internal Rate of Return.

Suppose i want to have Rs.10000 in my FD account in 12 months then at 10% Discount rate i should have Rs.909 in my FD account today. this simply means that Rs. 10000's today's value is Rs. 909.

So if I assume that my company will earn Cash at the rate of 8.5% every year, then i will discount all those cash flows with 12%. This simply means that whatever i am putting today in the company should grow by 12% IRR (Internal Rate of return)

Wiki says about Discount rate: This is what you might be looking for..
"The cost of capital is often used as the discount rate, the rate at which projected cash flow will be discounted to give a present value or net present value."

Edited by 9StockPortfolio - 27/Apr/2009 at 2:18pm

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