Free Cash Flow Based Calculator of Intrinsic Value of Stocks

Data Input
Market Price (Rs.)
Risk Free Rate (R) % [Google for 10Y Govt.Bond Rate]
Expected Risk Premium (Rp) % [In India safest will be 5% above Risk Free Rate]
Stock Beta (B) [Search for it in Reuters.com]
Market Value of Equity (E) Rs.Cr. [Look for companies balance sheet in moneycontrol.com]
Market Value of Debt (D) Rs.Cr.[Look for companies balance sheet in moneycontrol.com]
Number of Shares Outstanding (S) [Lakhs-0.1Million] Nos.[Look for companies P/L in moneycontrol.com]
Free Cash Flow of Last FY (F) Rs.Cr.
Free Cash Flow Growth for next 5 Yrs (gf) %
Terminal Growth Rate beyond 5th Year (Tg) %



Report
WACC (W) %
INTRINSIC VALUE PER SHARE (I/S)
RATIO OF MARKET PRICE & INTRINSIC VALUE PER SHARE

This free cash flow based calculator of intrinsic value of stocks can be used online for free.

It uses the concept of free cash flow (FCF), to estimate the fair price of stocks/shares.

One day I was searching online, any intrinsic value calculator on web.

I was surprised to see how less is available on the internet about intrinsic value.

Whatever was available were either too theoretical or unreliable.

Back in the past years, when I did my search, I could not find even one intrinsic value calculator.

So how small investors were estimating intrinsic value of their stocks?

Probably, they were either resorting to manual calculations or else, intrinsic value estimation was getting completely ignored.

This is only one side of the story.

The other question that must be asked is, why reliable intrinsic value calculators are not available online?

Who can code such a calculator?

Coding a intrinsic value calculator is not so difficult.

Still authentic calculators are not available online, why?

To develop an intrinsic value calculator a combination of “financial know-how” and “programming skill” is necessary.

This is a rare combination.

So why not a finance guy writes a formula, and programmers code it? It should be easy, right?

Well, estimating intrinsic value is more a skill than number crunching.

Like, no matter how much coaching is given, Pele’s, Tendulkar’s, Schumacher’s are born only once in decades.

Warren Buffett is a master of intrinsic value estimation.

So you see where he is, “among the richest men in the world.”

Intrinsic value calculators are rare to find on internet? No surprise why.

Warren Buffett is not going to code such a calculator for us. 🙂

Free Cash Flow Based Calculator of Intrinsic Value of Stocks - 2

Lets get real…

  • Finance people may not know programming skills.
  • Coders may not have the financial know-how.

People who has both these skills are not many.

Moreover, people who has this skill may not be willing to part with this knowledge.

Leave aside publishing it on internet.

Online, there are plethora of financial calculators available.

But why only intrinsic value calculator is so rare?

The root cause of this scarcity is the concept of intrinsic value itself.

It is a fact that the concept of precise intrinsic value calculation requires exceptional understanding of business.

Probably only handful people on this earth has this skill.

Moreover, precise calculation of intrinsic value is like impossible.

So what a common man should do, forget about intrinsic value? No.

I feel, even a rough estimation of intrinsic value can be a very valuable information for common men.

So what can be done?

#1. FCF Based Intrinsic Value Calculator- Explained

I told to myself that, if only rough estimation works, lets try to build a calculator by self.

This online intrinsic value calculator is result of this.

It can very approximately estimate intrinsic value of stocks.

The concept used here to estimate intrinsic value is very similar to DCF business valuation model.

We have tweaked the DCF model a little bit to make it user friendly for all.

Though this calculator is self-explanatory, but for first timers, I will explain few terminologies used in the calculator.

#1.1 Risk Free Rate

This is that rate of returns that we can generate, with zero risk.

Example: buying a 10 year government bond. These are risk free investment vehicle.

Risk free rate is easily available on internet.

On can google for the prevailing rate for 10 year government bond.

Present risk free rate is 7.5%

#1.2 Expected Risk Premium

When one invests in equity, expectation is to earn higher returns.

The factor by which equity yields returns over and above the risk free rate is called as risk premium.

Suppose SENSEX averaged return of 12% over last 5 years.

Considering risk free rate as 7.77%, the risk premium of Sensex becomes 4.5%

Actual Return = Risk free rate + Risk premium

12% = 7.5% + 4.5%

#1.3 Stock Beta

Some stocks are more volatile than others. What does it mean?

Suppose price history (last 52 Week) of a stock A is as below:

  • Mean Price: Rs.100.
  • 52W High: Rs.135 (35% above mean).
  • 52W Low: Rs.70 (30% below mean).

Price history (last 52 Week) of another stock B is as below:

  • Mean Price: Rs.100.
  • 52W High: Rs.122 (22% above mean).
  • 52W Low: Rs.73 (27% below mean).

Based on the price fluctuations, we can say that Stock A is more volatile than B.

Stocks showing larger volatility will have higher Beta.

Stocks showing smaller volatility will have lower Beta.

Some stocks are so stable that even during market crash these stocks show great resistance to price falls.

Such stable stocks have beta less than one.

Stocks which are more volatile (compared to index) will have beta more than one.

The higher is the beta more volatile is the stock.

Individual stock’s beta value can be easily obtained online from websites like Economic Times, Reuters etc.

#1.4 Market Value of Equity

This is also called as Net Worth.

This value is readily available in companies balance sheets.

Market value of equity is equal to share capital plus accumulated reserves.

Net Worth = Share Capital + Reserves

One can also find this information on moneycontrol, Yahoo Finance, Bloomberg etc.

#1.5 Market Value of Debt

This value is also readily available in companies balance sheets (long term debt).

One can also find this information on moneycontrol, Yahoo Finance, Bloomberg, etc.

This value highlights the debt level of a company.

Any company can have two types of debts:

  • Short term debt (STD).
  • Long term debt. (LTD).

When we talk about market value of debt, we mean total debt (STD+LTD).

#1.6 Number of Shares Outstanding in Market

Who holds companies shares?

Broadly, it can be classified as below:

  1. Promoters.
  2. Public
    • Mutual Funds.
    • Banks.
    • Other Financial Institutions.
    • Government.
    • Insurance Companies.
    • Foreign Investors.
    • Public (like we individual shareholders).

Sum-total of all the shares held by the above listed entities is called “number of shares outstanding”.

Suppose there is a company ABC whose number of shares outstanding is say 100 crore numbers.

It means, total number of stocks held by all shareholders of ABC is 100 crore numbers.

This value is available in companies financial reports.

In moneycontrol, it is available in profit and loss accounts.

#1.7 Free Cash Flow

Estimation of free cash flow is essential for calculation of intrinsic value of stocks.

What is free cash flow?

  • PAT (Net Profit)?
  • Net Profit minus dividend?
  • Net Cash flow from operating activity?

Free cash flow is none of these.

Free cash is that net cash that company can utilise to enhance shareholders valve.

How to estimate free cash flow (FCF)?

Like intrinsic value calculation is a specialised skill, estimation of free cash flow is equally tricky.

To know more about the concept of FCF, please read this blog post.

Online Free Cash Flow Calculator…

Data Input
Revenue (Rs.Cr.)
Cost of Goods Sold (Rs.Cr.)
Income Tax Expense (Rs.Cr.)
Current Asset-Last Year (Rs.Cr.)
Current Liability-Last Year (Rs.Cr.)
Current Asset-Current Year (Rs.Cr.)
Current Liability-Current Year (Rs.Cr.)
Capital Expenditure Rs.Cr.
Depreciation Rs.Cr.



Report
Free Cash FLow (FCF) Rs.Cr.

#1.8 Free Cash Flow (FCF) Growth Rate

Ideally, to estimate intrinsic value of stocks, one must guess FCF growth for at least next 5 years.

A reliable way to estimate free cash flow growth rate is by calculating free cash flow growth rate of last five years.

When one knows FCF growth rate of last five years, guess work for next 5 years becomes simpler.

For simplicity, one can consider same growth rate for next 5 years in future.

I personally add a factor of 75% in the past data.

Suppose a stock X showed FCF growth of 10% p.a. in last 5 years.

If I have to guess FCF growth of X in future 5 years, I will take 7.5% (75% of 10%).

Future FCF growth rate is used to estimate FCF’s, that the company may generate in next 5 years.

Lets call it FCF-(5Y)

#1.9 Terminal Growth Rate

In #1.8 we learn how to guess FCF growth for future 5 years.

But why only 5 years in future?

The company will not cease to exist after 5 years, right?

It will continue to generate FCF even after 5 years.

Our example Stock showed following FCF growth rates:

  • Last 5 Years: 10% per annum.
  • Future 5 Years: 7.5% per annum.
  • FCF growth rate beyond 5th year?

This FCF growth rate beyond 5th year is called terminal growth rate (TGR).

TGR is used to estimate FCF’s, that the company may generate from 6th year to infinity.

It is called Terminal Value (TV).

All FCF = FCF(5Y) + TV

Unless the analyst knows “All FCF” of a company, its intrinsic valued canned be calculated.

For the sake of simplicity, experts prefer to assume TGR as 3% for most of the stocks.

2 Comments

  1. Great, priceless & valuable work u’d provided. Hopefully u create apps on playstore. It’s painstaking but u’d made beautifully complicated things simple. It’s real genius work who makes things simple. Thank you very much 🙂

  2. The number of shares have to be put in million or crores? for example if there are 7.4 crore shares then shall I put the digit 7.4 (crore) of 74 (million). common sense dictates 7.4 since all other numbers are in crore (fcf, debt, mv of equity etc.,), but just wanted to be sure. thanks.

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