Thanks.
So as per your experience which is the good method to value a stock?
I usually use a shortcut although it leads to the same result
I divide profit over market cap and want something that has roe of atleast 10pc and Low dividend which means the company can invest profits and generate an roe of 10pc
A consistent roe of 10+ percent usually means the company is not into commodity business but as usual not always
If profit over market cap falls below current interest rate or within 1-2 pc I assume I am getting better rate than bank for my investment and because itâs compounding with consistent roe eventually the return is likely to get better than bank interest rate
It doesnât involve a lot of formulas but I also look at enterprise value
I look at debt, it should not be 4-5 times yearly profit
I make sure operating cash and investing cash together is atleast 5pc of revenue over a 5-10 year period which ensures the company is not just investing in assets and not recovering the asset cost (a typical characteristics of a commodity company)
Plus I read 2-3 years annual report, put a news alert on google for the sector and company
Below are the valuation methods (assuming company is doing good (RoE and RoCE > 15, Consistent Growth) which I found on Investing sites other than DCF.
Industry and Stock P/E -
Multiply Industry P/E and Sock P/E. If the value is more than current stock price then stock is overvalued. Add 10% for margin of errors.
Historical P/E -
Current P/E falls below the historical P/E of 3/5 years then stock is undervalued.
P/E comparison with Profit Growth.
Stock is undervalued when 5 years of average P/E is less than 3 years of average growth.
EPS, Dividend and P/B
Value of â(EPS + DIVIDEND) / PBâ is greater than 10 then fairly valued. If greater than 15/20 then undervalued.
There are many companies but mostly commodities
If I am only looking at that variable look at Hero Motocorp and TVS Motor
Hero y.e.2013 p.e. 19.8
Hero y.e.2018 p.e. 19.3
TVS y.e. 2013 p.e. 18.3
TVS y.e. 2018 p.e. 43.2
Profit of Hero Motocorp 3692. Whole company can be bought at/trading at 59374cr
If I had unlimited funds putting 59374 into Hero will yield me 6.2pc
EPS growth of Hero over the years
2008 13pc
2009 34pc
2010 53pc
2011 -15pc
2012 41pc
2013 -14pc
2014 -1pc
2015 14pc
2016 33pc
2017 17pc
2018 9pc
I would assume roughly 8-10pc compounded growth
Hence next year on my investment of 59374cr, I could expect the company to earn 4061 (its an example, I am taking higher end to demonstrate)
So year 2, if I owned the whole company I am getting 6.8pc
Its increasing rate of return faster than the bank. Say bank currently is 6.5pc. If I had put in the bank, it would most likely be 7pc next year, 8pc following year but at some stage it will stop going. It cant be 20-30pc unless we have a major problem like Argentina
So you use DCF you get around the same results but the method is faster and easy to calculate in your head without starting up and excel sheet and putting all dcf numbers, discount rates, etc etc which are subject to a lot of debates.
6.5pc is your discount rate as thats what you get at the bank. Why not use backward calculation and see if it makes sense to buy in probably 1/100th the time.
If Hero Motocorp is going to go through an expansion and we see that products are in demand and most of the expansion will be sold we can use current profit multiply it by how much the expansion will be and arrive at the percentage the company is available at.
You still have to look at interest cover, debt, but I have covered that in the first post
What is relation between roe and price to book and how market values generally 15 20and30roe companies in bull and bear markets
The direct relation is:
P/BV = (RoE - g)/(r - g)
Where P = Price, BV = Net Worth, RoE = Return on Equity, r = Cost of Equity and g = Profit/Dividends Growth Rate
Of course, this relation is applicable only for a stable-growth firm. But the logic being, a company earning a higher RoE tends to have a higher P/BV. The derivation, if youâre interested, is here.
Hi ,
Can anyone please tell me how can I find out , how much time it usually takes to reflect increasing/decreasing raw material prices in P&L statement. For example , if metal prices are low and its a raw material for any industry , when its effect will be reflected in P&L , in recent quarter or next quarter results. How can I calculate this or at least have a fair approx idea.
Namaste sir,
I am glad you have this thought of talking basics.
I am looking for basics in fundamental analysis. Basics of Balance sheet, Profit and loss and Cash flows. how to read them, what to look out for and ?
Please help
namaste ,
Amrish
For Beginners , you start reading books like one up on wall street , beating the street by peter lynch and Buffetology. Once you completes them , you can start reading the intelligent investor by Benjamin graham.
hi seniors,@dineshssairam @Donald @hitesh2710
Need your help in understanding the cash flow statement (i have been working to create my own DCF Template)
I want to calculate the FCF of Meghmani Organics, but got stuck with the value of capital expenditure.
In the annual report (2017), the purchase of Fixed Assets (March 2017) is shownâ>6990.36
While in anual report (2018), the purchase of Fixed Assets (March 2017) is shownâ>3124
My doubt is why the purchase of the fixed assets (2017) is not same in these two annual report? and how should i calculate the FCF value using the above values
Thnks in Advance
Are you sure youâre looking at the Consolidated statements in both the cases? Looks to me like you are looking at the Consolidated figures for 2016-17 and the Standalone figures for 2017-18. Here is the Consolidated CFI for 2017-18:
There is still a minor difference, which could potentially be chalked up to accounting policy changes. An accountant may be able to help you better here.
Thanks @dineshssairam for your prompt reply.
My bad, i was looking at the different statements (as rightly pointed out by you)
hi @dineshssairam,
sorry for disturbing but i am stuck again and need your help.
While calculating the free cash flow, we need Change in Working capital as Input.
in Order to get the data for 2018 calculation, i took out the balance sheet for 2017-18.
i Calculated change in Current Asset (83916-74031=9885 Lakhs),
Then i calculated Change in CL (45241-55210= -9969 Lakhs)
Finally, i got Change in WC=9885-(-9969)=19854 Lakhs=198 Crores
The above number needs to be deducted as cash outflows from net income in the process of calculating the FCF.
But (in order to do recheck) when i analyzed the Change in Working Capital through Cash Flow Statement, it gives completely different number (as they have also included Non Current Item).
you will observe that the working capital changes in cash flow is only 338 Lakhs (as compared to 19854 Lakhs that we have calculated using Balance Sheets)
PLease let me know if i am missing any point.
Working Capital is not the same as Net Current Assets (i.e. Current Assets - Current Liabilities). The simplest definition of âWorking Capitalâ is âNon-Cash Current Assets net of Non-Debt Current Liabilitiesâ.
In this specific case, I would personally calculate a WC decrease of Rs. 454.39 Cr (i.e. A Cash Increase of Rs. 454.39 Cr):
(Download: Meghamani Organics WC Calculation.xlsx (12.3 KB))
By the way, if you refer to the Notes to Financial Statements, both âNon-Current Financial Assetsâ and âOther Non-Current Assetsâ seem to be just bank deposits and such, which should ideally be considered as Current Assets. Anyway, I have considered them as âOther Financial Assetsâ for the purpose of this calculation (I have highlighted this figure in yellow).
Even still, my calculation does not actually match with whatâs represented in the Cash Flow Statement of the company. Itâs off by Rs. 115.67 Crores. Indeed, there are several minor discrepancies in the figures I calculated and whatâs shown in the Cash Flow Statement (Highlighted here in red).
This could be an accounting adjustment, where an Accounting change has happened (Say, the sale of a Current Asset), but the cash has not been received by the company yet, therefore creating a discrepancy in Cash Flows.