How do I calculate the intrinsic value of a stock? - Seedly
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FSM INVEST EXPO 2020

Anonymous

Asked on 18 Jan 2020

How do I calculate the intrinsic value of a stock?

What's the criteria/method that you use when valuing a stock?

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Heah Min An
Heah Min An
Level 5. Genius
Updated on 20 Jan 2020

I only have 2 methods + 1 pre-requisite:

Method A:

Buy the company for its dividends 👉🏻 use dividend yield method (Google the formula)

💡Determine the yield that you want also you to know the price that you’ll buy this company at

Method B:

Buy the company for its earnings/cash flow powers 👉🏻 use the discounted method (I.e. over a 10 year period, if I earn $10k each year, should I pay a price of $100k now?)

🔆Pre-requisite: Formulas have always been there. Strangest part is when investors ain’t clear of their intentions of buying the stock. Once I clear this huddle, it’ll a breeze.

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Lim Boon Tat
Lim Boon Tat, Mathematics at Cambridge University
Level 6. Master
Answered on 20 Jan 2020

Hi Anon! Sounds like you're getting into value investing! Let me refer you to one of the gurus: Warren Buffett. He has mentioned the concept of "intrinsic value" every single year in his annual letters (https://www.berkshirehathaway.com/letters/letters.html). You may find it very instructive to read through them.

Specifically, you may refer to the Owner's Manual (https://www.berkshirehathaway.com/ownman.pdf), page 22. A quick discussion on the intrinsic value.

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Choon Yuan Chan
Choon Yuan Chan
Level 9. God of Wisdom
Answered on 18 Jan 2020

For dividend stocks, it is the DCF method which is to sum up the total value of cashflows

For stocks that are considered cigar butt investing, it is the relisable net asset value which counts the total value of its asset then discounts its property and receivables minus total liabilities

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Alvin Teo
Alvin Teo
Level 6. Master
Answered on 23 Jan 2020

A lot of people mentioned discounted cash flow. However, it relies on a lot of deep understanding of the business and its future undertakings, prediction, and those predictions actually coming true.

If you are beginner, you should try to do asset based valuation. Simply put, its all the assets (tangible and intangible) minus liabilities. Apart from finance related companies, most traditional businesses can be evaluated using this method first.

My take is that, if you value a company to be worth $1 today, and it is trading at $0.30, if the company liquidates tomorrow, you could be getting a profit even. This requires little to no knowledge as to how to company is going to make its money in future.

It also teaches you to go through annual reports and balance sheets.

Once you are comfortable, then use discounted cash flow methods when you have better understanding of how it's undertaking makes money for the business and sustainability.

Although I mention if the business close shop tomorrow, but that shouldn't be your timeline of investments, a school of thought amongst value investors is trying to invest in a stock for a few years hoping it will unlock value and bring about huge capital gains.

No one will be able to give a definitive answer on valuating a company. Just hope you find one that resonates with your values and you can profit of it.

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Lee Jiahui
Lee Jiahui
Level 6. Master
Answered on 20 Jan 2020

I mainly use yield because that way provides more margin of safety to beat the market. There are more important factors to stock selection, price is always the first criteria to get me to analyse, and price is always the last criteria to get me to buy. In between, it's a lot of reading and thinking.

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Billy Ko
Billy Ko
Level 7. Grand Master
Answered on 19 Jan 2020

Financial-modelling is one thing, but getting the numbers to put it in is another. How would you forecast revenue for the next 5 years, how would you value changes in management and how convincing and accurate it is is the largest consideration, thats how stock pitches are made. Truth be told, to obtain a target price, a lot of numbers that are input are fluff

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pat
pat
Level 7. Grand Master
Answered on 19 Jan 2020

DCF is the more common ways to calculate intrinsic value. Other methods can be based on P/E, DDM, FCF, RI.

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Bjorn Ng
Bjorn Ng
Level 9. God of Wisdom
Answered on 18 Jan 2020

For me, I use EV/EBIT, and I calculate their forward earnings. That would show me the intrinsic valu of the stock. There are other methods like the DCF model as well, but different business would kind of "require" different metrics to look at, for example EV/EBIT would not work for SaaS companies.

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Wilson Nid A Break
Wilson Nid A Break
Level 9. God of Wisdom
Answered on 18 Jan 2020

Liquidation value : Net Equity = Assets - Liabilities

Long-term value : DCF of future Free Cash flow

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