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We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (A$, Millions) AU$765.8m AU$489.5m AU$370.2m AU$310.4m AU$278.0m AU$260.1m AU$250.7m AU$246.6m AU$246.0m AU$247.7m Growth Rate Estimate Source Est @ -52.80% Est @ -36.08% Est @ -24.37% Est @ -16.17% Est @ -10.44% Est @ -6.42% Est @ -3.61% Est @ -1.64% Est @ -0.26% Est @ 0.70% Present Value (A$, Millions) Discounted @ 6.4% AU$720 AU$432 AU$307 AU$242 AU$204 AU$179 AU$162 AU$150 AU$141 AU$133 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$2.7b The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 6.4%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$248m× (1 + 2.9%) ÷ (6.4%– 2.9%) = AU$7.4b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$7.4b÷ ( 1 + 6.4%)10= AU$4.0b The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is AU$6.6b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of AU$5.3, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. 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Check out our latest analysis for Yancoal Australia Strength Currently debt free. Dividends are covered by earnings and cash flows. Dividend is in the top 25% of dividend payers in the market. Weakness Earnings declined over the past year. Opportunity Good value based on P/E ratio compared to estimated Fair P/E ratio. Threat Annual earnings are forecast to decline for the next 3 years. Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Yancoal Australia, we've compiled three essential aspects you should consider: Risks: For example, we've discovered 2 warning signs for Yancoal Australia (1 shouldn't be ignored!) that you should be aware of before investing here. Future Earnings: How does YAL's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data