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Overview
DCF Valuator is a service of Global Value Investing with Stock Valuation, a multifaceted approach to value investing with stock valuation based on intrinsic value estimated from discounted cash returns, appraised value of assets, and other facets of value. No downloading. No enabling of active content. Forms-, tables- and graphics-enabled browser required. |
Online Interactive Graphical Models
Doing research is the key to making sound investment decisions. To either include or exclude stocks with certain characteristics in the common stock universe, you may possibly do an optional stock screening which does not and cannot by definition do any kind of meaningful valuation. For the companies on your short list for further study, you eventually should read the companies' financial reports to shareholders in order to gain a better understanding of the stocks you are considering buying. You can also use your research to find stocks where the analysts may be wrong because they are trapped by institutional dynamics and blinded by narrow specialized expertise. By spending the time and effort to more deeply understand a company's history and financials, you can arrive at your own conclusion as to what the cash returns will be in the future. This will enable you to make a more accurate forecast and a better estimate of intrinsic value, which will "beat the market" that follows published analysts' opinions.
The purpose of investment valuation of a company is to decide whether or not to buy its common stock. Great precision in the calculated value is not needed as much as a high level of confidence in the decision taken. A company can be evaluated without getting bogged down in the tedium of number crunching and thereby getting distracted from the main purpose.
The DCF Valuator suite of investment valuation models is not a stock-screening tool to reduce the universe of investment opportunities to a manageable number and sort them in rank order of some criteria of desirability on the basis of historical data. Rather, the models are forward-looking valuation tools for your candidate companies. They are not mere spreadsheet programs with flat grids and hidden formulas to connect the cells. Rather, they are professional tools for serious investors in non-controlling interests of publicly-traded companies.
Common Stock Investment Decision Models | ||
· voluntary subscription to receive the DCF Valuator Insighter newsletter for examples and update news when appropriate | ||
· transparent, demystified, no voodoo | ||
· easy-to-use dialog-driven interactive interface walks you through the analysis and either retrieves or asks for the necessary data at each step | ||
· several valuation, growth and return models are available for any investment | ||
· can save narrative, tabular and graphical results to your hard disk | ||
· calculates single-point estimates of intrinsic value based on expected dividends or free cash flow to equity owners, with the following valuation features: | ||
· automatically calculate internal rate of return after brokerage commissions, income taxes, and, where applicable, currency exchange fees for foreign investments | ||
· automatically performs sensitivity analysis of changes in intrinsic value resulting from changes in key variables | ||
· automatically goal-seeks the changes in key variables that result in target market price or target margin of safety | ||
· automatically uses Monte Carlo simulation of growth outcomes and presents a range of scenarios for intrinsic value with the mean, standard deviation, key percentiles, and graphs of the Probability Distribution Function and the Cumulative Distribution Function | ||
· automatically displays intrinsic value analyses in tables and in 2-D and 3-D graphs | ||
Other Methods of Calculation
The intrinsic value of a company can be calculated with a pencil on the back of an envelope or scrap paper. Valuations can be made quicker and usually more accurately on a hand-held financial calculator such as the Hewlett-Packard 12C, or the programmable Hewlett-Packard 38C with more memory for uneven (unequal or different sign) cash flows. They can be made more intuitively offline with a spreadsheet program such as the MS Excel software package, with or without user-designed graphing capabilities. Or they can be made more powerfully and more conveniently online by accessing valuation models located on a remote web server. Online calculations add a simplified user-friendly interface, a collection of ready-to-use valuation model types, input data retrieval which can be overridden if desired, and automatic graphical presentation of results.
A central concept in finance that applies to intrinsic value is the time value of money (TVM). To refreshen your knowledge of TVM calculations, go to Financial Players Center and check out their information and quiz. In addition, you can use their Future Value Calculator to find the present value of each annual net cash flow per share in a stream of dividends and ending price. By adding these present values, you will have the total intrinsic value per share. This can serve as an interim solution for those who prefer to work online.
A more advanced treatment of TMV as well as information about probability distributions can be found at TeachMeFinance.com. This resource also discusses the Capital Asset P-r-i-c-i-n-g Model (CAPM) which, as its name says, is not a valuation model. Price is not value.
Additional educational resources include the book entitled Introduction to Cashflow Analysis by Robert J. Donohue (see the citation in General Books) and the book entitled The Economic Analysis of Capital Investments for Managers and Engineers by G. T. Stevens (see the citation in General Books). A static example of the calculation of investment value and safety margin may be used as a general guide. Example spreadsheet models are available for free download, as is the McKinsey model (see the Site Map for its location).
The heart of any investment valuation model is the forecast of periodic cash flows, either dividends or free cash flow to the equity owners. Most people have difficulty thinking in terms of temporal configurations and interpreting time-dependent processes, especially in complex, uncertain, dynamic systems characterized by many variables that are not all known and may be defined as a random probability distributions, inter-dependencies among the variables that are not all transparent, and changes in conditions over time that do not repeat in a regular pattern. A good introduction to systemic thinking is presented in The Logic of Failure by Dietrich Dörner (see the citation in General Books).
GIGO Principle
A pencil, hand-held calculator, spreadsheet program, and financial model have one thing in common. Essentially each is merely a tool. A tool is not a brain. A tool is no substitute for judgment. A tool cannot replace intensive study and comprehensive analysis of a company within a circle of competence. The inelegant but succinct aphorism "garbage in, garbage out" (GIGO) applies to all calculations of the intrinsic value of a company and its stock. Attempts to apply econometric pricing models such as fuzzy logic, artificial intelligence, statistical fractals, chaos theory, neural networks, genetic algorithms and other non-linear tools to the task of valuation often obfuscate this principle.
Range of Value
"Summary. Future cash flows are seldom know with certainty. It is therefore necessary to adjust for risk when performing discounted cash flow analysis. This is normally done either (1) by adding a suitable risk premium to the riskless interest rate and discounting the expected cash flow stream or (2) by discounting the alternative cash flow streams separately and displaying the resulting discounted cash flows together with appropriate summary statistical measures such as standard deviation or variance. The two procedures will produce similar results." Corporate Financial Analysis: A Comprehensive Guide to Real-World Approaches for Financial Managers by John D. Finnerty, Chapter 5 "Risk Analysis", page 76. See the citation in General Books.
The so-called riskless or risk-free interest rate is the rate on a debt security issued by a strong, stable sovereign government. The alternative cash flow streams may be associated with either (1) a scenario analysis with a small number of future business environments such as best case, middle case, and worst case, or (2) a simulation with a large number of randomly-generated future economic states of the world ranging from most optimistic to most pessimistic. The summary statistical measures of the simulation include a graph of the probability distribution of resulting intrinsic value.
The DCF Valuator includes several models to calculate a deterministic single-point intrinsic value and a stochastic or probabilistic range of intrinsic value for different forecasts of cash returns.
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