![]() The current price of this share is Rs.3,950. As the estimated intrinsic value is higher than the current price, hence it is undervalued. It is after applying the margin of safety. In our example, the intrinsic value comes out to be Rs.5,733. For lesser-known companies, I prefer a margin of safety (MOS) of 35%.Īdjusted Intrinsic Value = Calculate Intrinsic Value * (1 – MOS) Why only 15%? Because I know about the company’s business and its management. It is always better to keep a margin of safety (MOS) on our calculated intrinsic value numbers. Hence, I can take it as my discount rate. What does it mean? It means I’ll earn an assured return of 7% per annum even if I’m not investing in stocks. Banks are offering a 7% rate of return on a fixed deposit scheme. Suppose we do not buy this stock, and we buy a bank deposit. I’m assuming a discount rate of 7% per annum. We will have to calculate the present value of it by using a suitable discount rate. The final price comes out to be Rs.13,269. Now, we will put these values in our future price formula. We have calculated the following three components of our intrinsic value formula: PE For The Formula = PE Trend * (1 – 10%) = 34.2 Final Calculation For less known companies, I prefer a correction factor of 20% or higher. As the time is so far ahead in the future, I’ll suggest a correction factor of 10%.Īs I’m conversant with this example company, hence I’ve considered a smaller correction factor. Why? Because we are assuming that this PE will continue to remain the same after 10-years from now. Hence, as per the trend pattern, assuming a PE of 38 looks fair.īut we must apply the correction factor. The trend curve of the PE is also plotted. In the last seven quarters, the PE ratio of the company is calculated. I’ve done these calculations for our example company. These two values will help us to calculate the P/E ratio. We will also record the share prices on the date of reporting of the quarterly numbers. To do it, we will record the EPS of the last ten quarters. Here again, we will try to establish the PE trend. A company with rising EPS and a high ROIC can continue to maintain or even improve its PE. To do it, we must first review the above two numbers (EPS and ROIC). Future PEįorecasting future PE is not easy. ROIC For The Formula = ROIC Trend * (1 – 25%) = 17.1% #c. That is why I’ve used a correction factor of 25%. ![]() ![]() Using a lower number than what the trend is suggesting will be better. When we see so far ahead in the future, errors can creep in. Hence I’ve considered it for the calculation.īut before putting the number in the formula, we must correct the value.īecause the ROIC number is used as a growth rate of EPS for the next ten years. From the trend, it looks like the value of 22.8% is a stable number. Again, important here is to note the ROICs trend line.
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