Buffett and other respected investors mention that if you need a spreadsheet to determine a fair value of a company, the investment idea should be thrown into the pass pile. I only agree to some degree on this comment. For me, as I run through companies, I always look at the free cash flow and cash flow statement first to determine whether the business is worth investigating. So even with 4 analysis tools in my toolkit, there is a hole that needs to be filled. Currently, I am still unable to value companies that are:. The stock valuation method allows the investor to value all of the above points.
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Microsoft MSFT will serve as a fine example since you know the history of the company and what it does. In respect to no. Applying this idea to Microsoft, the first step is to adjust the balance sheet.
We are trying to get to a figure that a competitor will have to realistically pay up in order to enter the market. Step two. Some companies will spend very little for both aspects and it can be ignored but to ignore for MSFT would be a mistake. Something else to remember is that although off balance sheet liabilities are liabilities, a significant part of that will also have to be reproduced by a new entrant in order to start business.
VVTV may be just another home shopping company but for a new competitor to enter the market, they will have to spend money on carriage licenses and other network equipment and licenses that will sometimes not appear on the balance sheet. It may be a liability when valuing the business as a standalone, but when considering what a competitor will have to pay, it should be included. The final step to calculate the net reproduction cost is to subtract non interest bearing debt and the cash not required to run the business.
Non interest bearing debt is really spontaneous liabilities. The concept is very similar. Start off with EBIT, and start working through items and decide whether to add it back or ignore it. First step. Start off with operating earnings, i. Find out if there are any one time charges and add it back.
Third step is to apply a tax rate to the adjusted EBIT. Which is represented by the Adjusted Earnings After Tax line in the image above. Fourth step you add back in a certain amount of depreciation and amortization. The best thing is to be familiar with the business and industry to accurately assess the equipment needed and how fast it loses value etc. When you do all those steps, you finally come up with an Income as Adjusted number. What I do, along with all of the other valuation techniques, I smooth out the data by taking multiple year snapshots and then taking the median of these timeframes.
This way I come up with a normalized adjusted income to ignore business cycles and the occasional overly bad or good year. So with the normalized adjusted income you subtract maintenance capital expenditures and divide by the discount rate.
The result is the EPV, which is the value of the company based on current earnings and ignoring growth. But there is one last step. Lastly , add to the EPV value Cash-debt because operating earnings ignore the interest on cash balances so you have to add the surplus cash to the EPV.
Everything is just based off automatic calculations so you could fine tune your results if desired. In this case, the normlized earnings EPS growth by Microsoft over the past 10 years has been at We are driven to provide useful value investing information, advice, analysis, insights, resources, and education to busy value investors that make it faster and easier to pick money-making value stocks and manage their portfolio.
Toggle navigation. Generic selectors. Exact matches only. Search in title. Search in content. Search in excerpt. Search in posts. Search in pages. Table of Contents show. Adjusting the Earnings for EPV. EPV Final Caluation. Ben Graham Formula Valuation. Stock Valuation Comparisons. Box 64 Rye, NH OUR MISSION We are driven to provide useful value investing information, advice, analysis, insights, resources, and education to busy value investors that make it faster and easier to pick money-making value stocks and manage their portfolio.
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Earning Power Value (EPV) Method of Stock Valuation
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Earnings Power Value (EPV) Stock Valuation How-To
Posted By: 22percent May 19, , am. This is an excellent slide show where Bruce Greenwald describes one of his valuation techniques which he wrote about in his great book Value Investing: From Graham to Buffett and Beyond. This scribd document appears hard to read online, but it really is not. Click on full screen and it is easy to read. The whole document is about 43 pages. There is a lot of valuable information about calculating intrinsic value in the document. Any intermediate or experienced investor I think will appreciate the notes.