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Forbes
2 days ago
- Business
- Forbes
What Is ASC 820, Why Is It Important For Positive Investor Relations?
Tomas Milar is the Founder and CEO of Eqvista, an equity management platform. Financial and operational strategy optimization often overshadows the importance of maintaining positive investor relations in tiding over market turbulence. For example, the U.S. technology sector took a hit this spring against the backdrop of the trade wars triggered by announced tariff hikes. This was reflected in the Nasdaq-100 Technology Sector index, whose six-month returns were -11.84% as of April 23. In contrast, Zscaler, the company that was presented the 2024 IR Magazine Best overall investor relations (large cap) award, saw a 10.82% rise in the same period. A key obstacle in maintaining positive investor relations is strengthening investor confidence in reported asset valuations, especially when your company has a large amount of intangible assets. Complete and structured transparency, like that obtained by complying with ASC 820, is often the best solution to alleviate such concerns. This article will explore the significance of ASC 820 and how you can comply with this accounting standard. ASC 820's Significance ASC 820, also known as the Fair Value Measurement standard, is an accounting standard that guides companies in measuring and reporting their investments in a GAAP-compliant manner. For instance, in an acquisition, ASC 805 requires the acquirer to recognize the acquired party's assets, liabilities and non-controlling interests at fair value. Under other ASC accounting standards, fair value assessments are required for intangible assets and financial assets in periodic financial reporting and reports made by investment companies to their investors. This enhances consistency and comparability in financial reporting as a result and enables investors to understand the value of assets owned by their companies. Since ASC 820 also includes disclosure requirements, it not only requires fair value reporting but also explanations regarding valuation processes and assumptions. Such reporting enables investors to perform informed analyses and better anticipate events that could impact the value of company assets. How To Comply With ASC 820 To comply with ASC 820, you must calculate an asset's fair value as the price at which two knowledgeable principal market participants would willingly exchange it on the measurement date. If a principal market does not exist, the market that would provide the best selling price should be considered. Another condition for ASC 820 compliance is explaining your valuation methodology to help the intended reader interpret the fair values reported. While this accounting standard requires you to consider prices in principal markets, not all assets have active markets. Therefore, we must categorize assets as level 1, level 2 and level 3 depending on the difficulty in ascertaining fair values and then choose appropriate valuation methodologies. Level 1 assets have active markets and hence have quoted prices. Publicly traded stocks, commodity derivatives, government securities and exchange-traded funds (ETFs) are some examples of level 1 assets. Assets that lack active markets and quoted prices but whose value can be calculated using observable inputs are called level 2 assets. For instance, a derivative of a level 1 asset would qualify as a level 2 asset. Such a derivative does not have an active market, but its value can be calculated based on the level 1 asset's value. Trademarks and other intellectual properties, private equity and various other assets whose value must be determined using unobservable inputs are called level 3 assets. These levels are informally referred to as liquidity hierarchy levels since the asset liquidity reduces with increasing levels. However, fair value hierarchy is the official term for this classification method. The fair value of level 1 assets must be the quoted prices on the measurement date. For level 2 assets, the fair value must be calculated based on the input values reported on the measurement date. Finally, level 3 asset fair values must be calculated based on estimations and assumptions based on the latest available data on the measurement date. Under ASC 820, the following valuation approaches are prescribed for level 2 and level 3 asset fair value reporting. Certain assets that can generate positive cash flows can be valued using the income-based valuation approach. This involves estimating all future cash flows expected from an asset and then discounting them to arrive at their present value. Businesses that are nearing liquidation are often valued using the asset-based valuation approach, wherein we simply calculate the business' net worth as total assets minus total liabilities. In this valuation approach, we arrive at the value of an asset by referencing the published fair value assessments and selling prices of similar assets. One of the methodologies that comes under this approach involves establishing a market valuation multiple by dividing the total value of similar assets by an observable and relevant metric. As this method relies directly on market data, it aligns most closely with the requirements of ASC 820. ASC 820 Disclosure Requirements To allow investors to validate fair values and anticipate any fluctuations, ASC 820 requires you to disclose the following details. Knowing the liquidity hierarchy level helps investors judge whether the correct valuation methodology has been used. You must explain the valuation methodology used and the reasoning behind your choices. This is especially important in the case of level 3 assets, where you would often customize asset valuation methodologies to make accurate fair value assessments. Any observable inputs and assumptions used in the fair value assessment must be provided to investors so they can independently validate the fair values. Since unobservable inputs must be assumed or estimated in level 3 asset fair value assessments, you must provide a sensitivity analysis to illustrate how variations or inaccuracies in these assumptions could impact the resulting fair values. Compliance Simplified One can interpret the intention behind ASC 820 as aiding prudent investment decision making by increasing consistency, transparency and comparability in financial reporting. If your business can abide by the spirit of the standard, it can maintain accounting compliance and positive investor relations. The information provided here is not investment, legal, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Yahoo
2 days ago
- Business
- Yahoo
An Intrinsic Calculation For PWR Holdings Limited (ASX:PWH) Suggests It's 24% Undervalued
Key Insights PWR Holdings' estimated fair value is AU$10.29 based on 2 Stage Free Cash Flow to Equity PWR Holdings is estimated to be 24% undervalued based on current share price of AU$7.87 The AU$8.27 analyst price target for PWH is 20% less than our estimate of fair value Does the July share price for PWR Holdings Limited (ASX:PWH) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex. We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. Is PWR Holdings Fairly Valued? We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (A$, Millions) AU$17.3m AU$28.2m AU$33.0m AU$38.0m AU$44.0m AU$48.5m AU$52.5m AU$55.9m AU$59.0m AU$61.8m Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x1 Analyst x1 Analyst x1 Est @ 10.32% Est @ 8.11% Est @ 6.56% Est @ 5.48% Est @ 4.72% Present Value (A$, Millions) Discounted @ 7.2% AU$16.1 AU$24.5 AU$26.8 AU$28.8 AU$31.1 AU$32.0 AU$32.3 AU$32.1 AU$31.6 AU$30.8 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$286m We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 7.2%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$62m× (1 + 2.9%) ÷ (7.2%– 2.9%) = AU$1.5b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$1.5b÷ ( 1 + 7.2%)10= AU$749m 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$1.0b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$7.9, the company appears a touch undervalued at a 24% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. Important Assumptions The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at PWR Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.2%, which is based on a levered beta of 0.979. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. See our latest analysis for PWR Holdings SWOT Analysis for PWR Holdings Strength Debt is not viewed as a risk. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Auto Components market. Opportunity Annual earnings are forecast to grow faster than the Australian market. Trading below our estimate of fair value by more than 20%. Threat Revenue is forecast to grow slower than 20% per year. Moving On: Valuation is only one side of the coin in terms of building your investment thesis, and it 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For PWR Holdings, we've put together three relevant elements you should explore: Financial Health: Does PWH have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Future Earnings: How does PWH'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
Yahoo
3 days ago
- Business
- Yahoo
BellRing Brands, Inc.'s (NYSE:BRBR) Intrinsic Value Is Potentially 42% Above Its Share Price
Key Insights The projected fair value for BellRing Brands is US$82.59 based on 2 Stage Free Cash Flow to Equity BellRing Brands is estimated to be 30% undervalued based on current share price of US$58.20 The US$77.87 analyst price target for BRBR is 5.7% less than our estimate of fair value Today we will run through one way of estimating the intrinsic value of BellRing Brands, Inc. (NYSE:BRBR) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward. We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. The Calculation We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF ($, Millions) US$343.9m US$390.5m US$421.0m US$456.0m US$483.5m US$508.1m US$530.8m US$552.0m US$572.3m US$592.1m Growth Rate Estimate Source Analyst x4 Analyst x3 Analyst x1 Analyst x1 Est @ 6.03% Est @ 5.10% Est @ 4.45% Est @ 4.00% Est @ 3.68% Est @ 3.46% Present Value ($, Millions) Discounted @ 7.2% US$321 US$340 US$342 US$346 US$342 US$335 US$327 US$317 US$307 US$296 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$3.3b The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.2%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$592m× (1 + 2.9%) ÷ (7.2%– 2.9%) = US$14b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$14b÷ ( 1 + 7.2%)10= US$7.2b 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 US$10b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$58.2, the company appears a touch undervalued at a 30% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. Important Assumptions The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at BellRing Brands as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.2%, which is based on a levered beta of 0.976. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. View our latest analysis for BellRing Brands SWOT Analysis for BellRing Brands Strength Earnings growth over the past year exceeded the industry. Debt is well covered by earnings. Weakness Earnings growth over the past year is below its 5-year average. Opportunity Annual earnings are forecast to grow for the next 3 years. Trading below our estimate of fair value by more than 20%. Threat Debt is not well covered by operating cash flow. Total liabilities exceed total assets, which raises the risk of financial distress. Annual earnings are forecast to grow slower than the American market. Next Steps: Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For BellRing Brands, there are three essential elements you should look at: Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with BellRing Brands , and understanding these should be part of your investment process. Future Earnings: How does BRBR'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE 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. 擷取數據時發生錯誤 登入存取你的投資組合 擷取數據時發生錯誤 擷取數據時發生錯誤 擷取數據時發生錯誤 擷取數據時發生錯誤
Yahoo
3 days ago
- Business
- Yahoo
Is PropNex Limited (SGX:OYY) Trading At A 50% Discount?
Key Insights The projected fair value for PropNex is S$2.67 based on 2 Stage Free Cash Flow to Equity PropNex's S$1.34 share price signals that it might be 50% undervalued Our fair value estimate is 111% higher than PropNex's analyst price target of S$1.26 How far off is PropNex Limited (SGX:OYY) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. The Method We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (SGD, Millions) S$105.0m S$102.9m S$102.3m S$102.6m S$103.5m S$104.9m S$106.7m S$108.6m S$110.8m S$113.2m Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ -0.59% Est @ 0.29% Est @ 0.91% Est @ 1.35% Est @ 1.65% Est @ 1.86% Est @ 2.01% Est @ 2.12% Present Value (SGD, Millions) Discounted @ 7.1% S$98.1 S$89.7 S$83.3 S$78.0 S$73.5 S$69.6 S$66.0 S$62.8 S$59.8 S$57.1 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = S$738m After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.1%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = S$113m× (1 + 2.4%) ÷ (7.1%– 2.4%) = S$2.5b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$2.5b÷ ( 1 + 7.1%)10= S$1.2b 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 S$2.0b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of S$1.3, the company appears quite undervalued at a 50% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. The Assumptions Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at PropNex as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.1%, which is based on a levered beta of 1.092. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. See our latest analysis for PropNex SWOT Analysis for PropNex Strength Currently debt free. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Real Estate market. Opportunity Annual earnings are forecast to grow faster than the Singaporean market. Trading below our estimate of fair value by more than 20%. Threat Dividends are not covered by earnings and cashflows. Revenue is forecast to grow slower than 20% per year. Looking Ahead: Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For PropNex, we've compiled three additional elements you should consider: Risks: Be aware that PropNex is showing 1 warning sign in our investment analysis , you should know about... Future Earnings: How does OYY'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. Simply Wall St updates its DCF calculation for every Singaporean stock every day, so if you want to find the intrinsic value of any other stock 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.
Yahoo
6 days ago
- Business
- Yahoo
Calculating The Fair Value Of Computershare Limited (ASX:CPU)
Key Insights The projected fair value for Computershare is AU$36.24 based on 2 Stage Free Cash Flow to Equity With AU$40.00 share price, Computershare appears to be trading close to its estimated fair value The US$37.55 analyst price target for CPU is 3.6% more than our estimate of fair value Today we will run through one way of estimating the intrinsic value of Computershare Limited (ASX:CPU) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. Step By Step Through The Calculation We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF ($, Millions) US$680.0m US$675.0m US$623.2m US$609.9m US$606.2m US$609.0m US$616.4m US$627.0m US$640.2m US$655.2m Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x1 Est @ -2.13% Est @ -0.61% Est @ 0.46% Est @ 1.21% Est @ 1.73% Est @ 2.10% Est @ 2.35% Present Value ($, Millions) Discounted @ 6.8% US$637 US$592 US$512 US$469 US$437 US$411 US$390 US$371 US$355 US$340 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$4.5b After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.8%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$655m× (1 + 2.9%) ÷ (6.8%– 2.9%) = US$18b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$18b÷ ( 1 + 6.8%)10= US$9.2b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$14b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$40.0, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. Important Assumptions Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Computershare as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.8%, which is based on a levered beta of 0.883. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. View our latest analysis for Computershare SWOT Analysis for Computershare Strength Debt is well covered by earnings and cashflows. Dividends are covered by earnings and cash flows. Weakness Earnings growth over the past year underperformed the Professional Services industry. Dividend is low compared to the top 25% of dividend payers in the Professional Services market. Expensive based on P/E ratio and estimated fair value. Opportunity Annual earnings are forecast to grow for the next 4 years. Threat Annual earnings are forecast to grow slower than the Australian market. Moving On: Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Computershare, we've put together three further aspects you should explore: Risks: To that end, you should be aware of the 1 warning sign we've spotted with Computershare . Future Earnings: How does CPU'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. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock 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.