investing

Fair value calculation methods

By

valuing stocks evaluated from price to book method to price earnins and future earnngs projection as of 2024.

  1. Freecashflow method
  2. Pe Ratio
  3. Book value
  4. PEG ratio by peterlynch

relative valuation model

  • an attempt to measure relative value and not intrinsic value, reflect the current mood of the market
  1. Price-to-earnings (PE)
  2. PEG Ratio- Price Earnings Growth
  3.  Enterprise Value to EBITDA Ratio
  4. Price-to-book (PB) Value Ratio.
  5. Price/Sales Ratio
  6. Price-to-cash-flow (PCF):
  • PCF ratio = Market price per common share/ Free cash flow per common share
  • PS ratio = Market price per common share/ Sales per common share
  • PB ratio = Market price per common share/ Book value per common share
  • PEG ratio = PE Expected/ % annual growth
  • PE ratio = Market price per common share/Earnings per common share
  • EBITDA Ratio= EBITDA / Revenue

 

Price to Book value

Average price to book value pb ratio 5 years* current year book value
current bv 200*8(average 5 years pb ratio)=
1600 historical fair value vs current market price
Price/5 years AVG BV * present BV = fair value
Dividend /rate of return -growth rate
Enterprise value.
Discounted cash flow.
It’s essential to mention that the reasons for a quick drop in a stock’s price shouldn’t indicate that the stock is fundamentally flawed or that it’s about to go to lower levels of valuation.

Example: kotak bank share intrinsic value

As of June 10, 2024, the intrinsic value of Kotak Mahindra Bank Ltd (KOTAKBANK.NS) is 1,868.48 INR. However, other models have produced different intrinsic value estimates for the bank, including:
Market Price: 1,724.25 INR
  • DCF – By Revenue: Fair value of 1855.52
  • DCF – By EBITDA: Fair value of 1878.45
  • By EBITDA Multiple: Fair value of 1659.52
  • By Revenue Multiple: Fair value of 1636.60
  • By Excess Return Model: Fair value of 14.47
  • Peter Lynch FV: Fair value of 1424.59
https://valueinvesting.io/KOTAKBANK.NS/valuation/intrinsic-value

Peter Lynch’s formula is:

Peter Lynch’s Fair Value = (Future EPS Growth Rate + Dividend Yield) / P/E Ratio

Less than a 1 is poor, and 1.5 is okay, but what you’re really looking for is a 2 or better. A Company with a 15 percent growth rate, a 3 percent dividend, and a p/e of 6 would have a fabulous 3.

KOTAKBANK.NS Fair Value

= Earnings Growth Rate x TTM EPS

KOTAKBANK.NS Fair Value

= 20.4 x 91.56

KOTAKBANK.NS Fair Value

= 1,868.47

Relative Valuation PE Multiples  trailing & forward pe

Range Selected
Trailing P/E multiples 14.8x – 16.8x 15.7x
Forward P/E multiples 12.6x – 14.6x 13.7x
Fair Price 1,327.8 – 1,536.45 1,437.95
Upside -22.8% – -10.7% -16.4%
Stock Price 1,720.00 INR
Fair Price 1,437.95 INR

PEG Ratio Peter Lynch’s Fair Value Formula and the PEGy Ratio

PEG did not consider dividends, 1869 by Mario Farina. lynch modified price-to-earnings to growth and dividend yield (PEGY) ratio.
PEG Ratio = P/E Ratio / Future EPS Growth Rate

PEGY Ratio = P/E Ratio / (Future EPS Growth Rate + Dividend Yield)

PEGY Ratio < 1.0: undervalued.
PEGY Ratio = 1.0: fairly valued.
PEGY Ratio > 1.0: overvalued.

ebitda multiple valuation

EV/EBITDA multiple, is a financial ratio that compares a company’s enterprise value (EV) to its annual earnings before interest, taxes, depreciation, and amortization (EBITDA).

EV= Mcap+ Debt-Cash & cash equivalents

Mcap of Britannia Industries= Rs.89920crs

Debt on the balance sheet = 721.55+1075.70= Rs.1797crs

Cash on the balance sheet=Rs. 77.6crs

EV= 89920+1797-77.6= 88045crs

EBIDTA= Profits before exception items & Tax+ Finance Cost+ Depreciation expense- Other income

= 2379.44+97.81+166.77-292.70

= Rs.2351crs

Thus,

EV/EBIDTA= 88045/2351= 37.45x

EV/EBITDA good ratio

EV/EBITDA values below 10 are seen as healthy

DCF analysis

DCF analysis can also be used to value a company and its equity securities by valuing free cash flow to the firm (FCFF) and free cash flow to equity (FCFE). Whereas dividends are the cash flows actually paid to stockholders, free cash flows are the cash flows available for distribution to shareholders.

FCFF= Cash flow from Operations – Net Investment in Long Term Assets

Calculating Present Value Using Free Cashflow Approach

step 1- Calculate the avg free cashflow- So avg of FY21 & FY20 = Rs.1491.25crs

Step 2- Identify the growth rate- we can assume 15% for the first 5 years and around 10% for the next five years.

Step 3- Estimating the future cashflow for next 10 years

Step 4- Calculate the Terminal Value

terminal Value = FCF * (1 + Terminal Growth Rate) / (Discount Rate – Terminal growth rate)

Step 5- Calculate the present value of these cashflows and the terminal value

 

Absolute Valuation discounted cash flow

determine the intrinsic value of an asset,  irrespective of market conditions or relative comparisons.

Absolute value Stock = Absolute value Business / Number of outstanding shares

Absolute Value = CF1/(1+r)1 + CF2/(1+r)2 + … + CFn/(1+r)n + Terminal Value/(1+r)n

Absolute Value = ∑ni=1 [CFi/(1+r)i + Terminal Value/(1+r)n]

Where,

  • CFi = Cash flow in the ith year
  • n = Last year of the projection
  • r = Discount rate

 

  • dividend discount model (DDM)
  • discounted cash flow model (DCF)

 

What is the difference between DCF and dividend discount model?

DDM: present-day price is worth the sum of all of its future dividend payments when discounted back to their present value.

DDM vs. DCF Valuation: What is the Difference? The dividend discount model (DDM) states that a company is worth the sum of the present value (PV) of all its future dividends, whereas the discounted cash flow model (DCF) states that a company is worth the sum of its discounted future free cash flows (FCFs).

 

Vivekam fair price Expected market price

price not affected by earnings example 120, 40% or 80 rupees affected by ernings 200 stock price.
60% price not affected by earnings.
  • Share price 200,
  • TTM EPS 10,
  • PE 20
  • Insrirnic value set by market 120  60% of market price..
  • Profit sensitive portion 80 rupees changes
80/10 = 8 vivekam PE
if Next year TTM EPS 15..
(15eps*20(pe)=300). As other analyst..  300 fairvalue by oher anayst EPS*PE=

Vivekam fair value model. price 40% lower to market price* 200-80 =120

instric value = iv
PE ratio = PRICE/EPS
Iv(EPS*yourPE)
Stock price = pe*eps
120+(15*8)=240 fair value. (vivekam sells at 240 other sells at 300 as assumption of PE 20.
Vivekam PE 8..

Fair price range  standard deviation 3 for quarters

Between quarters
Average market price last 2qtrs 200
Standard deviation 10 (volatility)
240+3*10= 270
240-30= 210
95% accurate.. in large cap stocks
Book value method.
Other method
Eps*bv*22.5 = square root  video

About Raju Ginne

AMFI Registered mutual fund distributor based in Hyderabad. you may contact me for mutual funds SIP investments Whatsapp: 9966367675.
nism certified research analyst