In the past I have shared some of my tools and research with the ValuePickr community.

In this post I would like to share one more tool that I have been using to decide which company to invest in. Unlike my first tool (InvestR), which looks at the company’s past, this tool looks at the company’s future. This is important because market are constantly trying to account for the future!

Estimate FY 18 earnings/EPS based on growth and FY17 EPS

Estimate FY 19 earnings/EPS based on growth and FY18 EPS

Estimate FY 20 earnings/EPS based on growth and FY19 EPS

Step 3:

Find the future price in FY20 by multiply FY 20 EPS with Average PE

Find CAGR of that future price as compared to the current price

Add Dividend Yield to that CAGR.

Now, if that CAGR is more than what I am looking for, then I consider buying the stock.

The most important thing to remember is that one needs to be very careful in choosing the future growth estimates and the PE! We might (will?) differ from each other on these numbers and that is what will make our investment decisions different from each other! Eventually the person who can get these estimates right will make the most money!

Hope this tool will benefit you in the same way it has benefited me. If you do find ways to augment it then do share the improvements for the benefit of the community.

Thanks for sharing Chirag. I do similar calculations but I don’t use the average PE for future price calculations. I assume the future PE to be a few points more than the long term growth rate.

Can you check apply this on “gravita india” and just for example suggests what’s future target coming? Reason for selection of gravita is consistent growth so predictions of future EPs can b realistic.

Isn’t this too simple??? From all the books that get recommended and all the various ratios, this seems so easy and simple… Or have I complicated things too much in my mind that this looks ridiculously simple. Note: I don’t yet have a methodology that I follow, so am still trying to discover myself in the value investing world… Is this the only thing that you follow? Also, how do you arrive at the average PE?? I understand the growth part from your comments…

We are trying to forecast the future growth and PE. Both these predictions and vary from person to person and there is a decent probability of them going wrong!

I have be collating PEs of companies on daily basis. So I just take an average of those numbers.

Thank you Chirag.
I’m novice to Investing. Just read Dhandho Investing book, which points to similar methodology.
Can you help differentiate between both? (Sorry, I’m assuming you might have read it)
Thanks again.

The toughest part in this approach is to choose the suitable future growth rate. I did this mistake many times, I was expecting the growth in future and later due to some reasons, their was degrowth in revenue and profit figures , which lead to downfall in price. If one can identify this variable correctly , than its v easy to make lot of money.

You are 100% right. This sheet makes it “look” simple to make money. But in fact it is not easy to get the numbers right.

That is the reason I use it in two ways:

Finding right entry points for EXTREMELY consistent companies (like HDFC Bank).

Finding right entry points so that I have a GOOD MARGIN OF SAFETY. In this case I just enter very pessimistic values to simulate the worst case situation.

One thing to remember in both the above points is the number should NEVER be optimistic.

Of course a company should make an entry in the spread sheet only after it has cleared all the fundamental wellness parameters.