My valuation technique

Hello, Greetings and Happy Diwali to members of this forum. I have been reading this forum since last year, though I have joined only recently and this is my first post.

I started to invest in Stock market about 1.5 years ago so I am far from an expert. However as a teacher of mathematics, the valuation techniques commonly used like DCF/DDM etc. clicked instantly with me. Though I never used them myself, because initially I believed I need more experience to use them reliably, but over time I have devised my own technique to evaluate companies which I thought of sharing them here. Hopefully it will be useful to many other members also. I would also request experienced members to share their feedback for further improvement.

There are already many valuation ratios like price to earning, price to book, ebit/EV etc. that are simple to understand but very much limited while techniques like DCF or DDM are somewhat complicated. So I developed 3 simple parameters that tries to incoporate the best of both.

These parameters are explained below in the following next posts.

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A few questions:

  1. Your post talks about DCF, but there’s no consideration of cashflows in your valuation method. Why is this the case? Which brings me to the next question:
  2. The valuation method only considers Growth as the major parameter (P/E is an input, not an assumption). What about the other drivers of value like Margins, Reinvestment, Depreciation, Risk and Competitive Advantage Period?
  3. If the logic is that all of these are captured by Profit Growth itself, how is this method any different from say, the PEG ratio?
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Have you had a chance to back test this valuation technique? I mean have you analysed the returns of under valued stocks over a period of time?

Hi Abhishek,
I find this logic helpful. It makes a lot of sense.
Have you made the ration in screener under =>
Could you share the code for that. I do not see LOG function available there.

Thanks. Saurabh

The Earnings Years (EY) is a good improvement on PE ratio. PEG ratio doesn’t quite serve the purpose. A company projected to grow at 30% for next 10 years and selling at 30 PE will give superior returns to a company growing at 20% and 20 PE, even if their terminal PE is same.

However EY becomes a speculative ratio. Its value will depend upon the individuals’ speculation about the future growth rate. Some businesses are highly predictable, you can be sure about their capability to sustain last ten years growth rate. For them EY can be computed as you have done. But others can be easily disrupted, and using EY at the peak of their business cycle can give false impressions.

One suggestion: You may want to replace r (expected growth rate) with r’ (expected real growth rate) by subtracting the discount rate, since the cashflow from any future year must be discounted before adding into present cash flow. This may help show how some of the low PE companies with negative real growth rate are actually overvalued.

Also EY alone does not determines whether the business is undervalued or not. It must be compared to growth runway available to company, by determining its opportunity potential and its ability to capture it. To take an example, a company with EY 10 but whose market will get saturated in 20 years at the projected growth rate may be costly than one at 15 EY but with the ability to keep growing for 30 years.


What if rate of growth i.e r =0 ? This can happen in cases like rental income generating companies. EY will be 0 ?

It will be equal to current pe then, however screener may show it as blank in that case.

Hi, Here is my thesis about a closely tracked stock. I am looking for opinions if I am thinking in the right direction or not. What valuation multiple to assign this company.

Kwality Pharmaceuticals Limited is an India-based holding company. The Company manufactures and exports pharmaceutical formulations in liquid orals, dry syrups, tablets, capsules, sterile powder for injections, small volume injectables, ointments, external preparations and oral rehydration solution (ORS)

While the Stock has run up from 100 rupees to 900 rupees according to the latest results:

Sales : 300 Crore

PAT : 94 Crore

I believe the remarkable performance by the company calls for a discussion.

Management has maintained it is able to repeat its first-half performance which means a PAT of FY PAT of 180cr+.

This translates into EPS of 180 and pe of 4.63 with an industry avg PE of 26 (Bulk Drugs).

Further 2 plants will get commissioned in next few months.
Company has also mentioned that due to Remdesivir and Propofol - it has gained a lot recognition in the international market and got PHARMACEUTICAL INSPECTION CO-OPERATION certificate.
According to even basic calculations, this stock deserves a PE rerating because of

Stellar performance
Margin expansion
Confidence in repeating the performance for the coming years.
Hope to get your view point on this situation.

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