원문 보기
do you want to know how to value a company warren buffett style well then stay tuned hey guys welcome to my channel investing untangled hope you're all doing well on this channel i post videos about stock market research detail business and stock analysis and also educational videos on stock market investing and if this is something that interests you then hit the subscribe button and follow my content here in this video today i'll explain to you the discounted cash flow dcf valuation method and how to figure out the intrinsic value of a stock using this method i'll explain to you the formula the calculation and also share with you an online free tool that is very reliable and accurately calculates dcf intrinsic value warren buffett has said multiple times that the most logical way of figuring out the intrinsic value of a stock is by figuring out the future cash flows that it will generate and then discounting them back to the present value and that is what discounted cash flow is here today i'll explain to you this dcf calculation using an actual example of google and we'll figure out the intrinsic value of google i'm sure you'll get a lot of value out of this video and in return if you can leave a like on this video that will help a lot so without further ado let's get started so to understand discounted cash flow valuation you should first understand the concept of owner earnings and warren buffett has actually coined this term and he has been using this for many years now for his own valuations he discusses that in his annual letters and i'll show you how you can get to that so first you should know what operating cash flow is it is cash generated by a company's normal business operations and you'll find it in the cash flow statement i'll show you where you'll find all these numbers the next thing is capital expenditures it's basically the expenditures or the expenses the company has its funds used by a company to acquire upgrade and maintain physical assets such as property buildings and industrial plant technology or equipment and this is of two types one is the maintenance capex the other one is the growth capex so maintenance capex as you can imagine it is funds required by the company to continue operating in its current form so money that is required to keep the business going the other one is growth capex it is expenditure on new assets intended to grow the company's productive capacity so as an example if you consider a company like walmart so if there is a store of walmart which has some flooring issues or its roof is damaged and it needs money to fix all those things that will go in the maintenance capex but if walmart plans to open a new store in a new location and grow revenues through that that will be considered as growth capex so this is how you distinguish between these two capital expenditures and owner earnings is operating cash flow meaning this minus maintenance capex meaning this now the problem with owner earnings is that operating cash flow is easy to find it's in the cash flow statement but most of the companies do not mention about maintenance capex so they do not give you a value in number of what the maintenance capex is so that's why if you want to invest in a company you should understand it so much in detail that you should know that how much it would roughly spend in terms of maintaining and running its business and obviously legendary investors like warren buffett know a lot about businesses that they invest in so they can easily figure out what the maintenance capex would look like these legendary investors also have the privilege of being in touch directly with the ceos and the management team of the company so that gives them additional insights into estimating what the maintenance capex will be but for ordinary investors like us we do not have those privileges so what we can do instead is instead of using maintenance capex we can use the whole capex so the whole capital expenditures so operating cash flow minus capital expenditures as a whole both maintenance and growth and that is actually called the free cash flow so here you can see that we are now subtracting a much bigger amount from operating cash flow because we are subtracting both maintenance and growth capex so we are subtracting a bigger amount meaning that will be leaving us with a smaller amount as free cash flow and that means we are being more conservative in terms of our estimations now warren buffett has said it multiple times the best way to value a company is basically discounting the future cash flows to present value and that is called the dcf or the discounted cash flow valuation model and here is a basic definition of it it is a valuation method used to estimate the value of an investment based on its expected future cash flows so dcf analysis attempts to figure out the value of an investment today based on the projections of how much money it will generate in the future now i'll tell you what you actually need to do this dcf calculation so obviously you're estimating future cash flows so you will need a growth rate at which you estimate the company will be growing so let's imagine a hypothetical company a and we think it will be growing by 10 annually so that will make its cash flows look something like this so if this is the present cash flow of a thousand dollars free cash flows going forward growing them at a 10 annual rate it will be generating these cash flows for the next 10 years and based on just these numbers you can sum all these up at the end of the 10th year whatever is the sum of all these cash flows that will be basically your intrinsic value ideally but again the dollar amount that you got by summing all these numbers up this cash you will get in 10 years but there is something called the time value of money what if you had all those cash flows just today and you could actually invest those and get good rates of return going forward to factor this discrepancy in you need a discount rate so you need to discount all these cash flows by that discount rate to get to the present value of all these future cash flows and that's what the discount rate is to put it simply discount rate is basically going to be the rate of return you want from your investment and once you know that discount rate the formula of dcf looks something like this so it's basically free cash flow that you estimated for all these years meaning these cash flows and you have to discount them with this discount rate and the way you do it is by dividing them by one plus discount rate for the first year one plus discount rate raised to the power of two for the second year one plus discount rate raised to the power of three for the third year and so forth so if you go to year ten this end will be ten so the sum of all these numbers will basically give you the discounted cash flow for the next 10 years but what you also have to do is you have to calculate the perpetual fcf meaning perpetual free cash flow now if you look at this hypothetical company a you have projected its cash flows for the next 10 years but it doesn't mean that after those 10 years it's not going to produce any cash it's just hard to estimate all those cash flows beyond this 10 year period so what you do is you use something like perpetual cash flow and this is the formula for calculating perpetual free cash flow it is last projected free cash flow basically the last one in this case if you're going for 10 years so this one will be this figure here the last projected cash flow and then you multiply it by one plus perpetual growth rate and what perpetual growth rate is it is a growth rate that you think beyond those 10 years the company will be growing with meaning it's hard after these 10 years to estimate what growth rate will the company be growing with so you just be conservative and keep it as low as possible and that will be your perpetual growth rate generally people keep it at three or even less than three which is the gdp growth rate of the us for example and you divide this by discount rate minus growth rate discount rate we got here and growth rate is this 10 so this will give you perpetual fcf and then you put them together you sum them up and that will be your intrinsic value of your company now keep in mind the higher the discount rate the lower the intrinsic value will be at this point this all might seem very complicated i'll show you a free tool that you can use and i'll show you an example of how you can do this calculation yourself and in case you want to set up your own excel file for your own dcf calculation please let me know in the comments below and if there is good demand for that i'll do a full video on that how you can set up an excel file for your own dcf calculation so let's recap this basically the things that you need for a dcf calculation is free cash flow growth rate perpetual growth rate and the discount rate let's go through a cash flow statement first and i want to show you where you can find operating cash flows and the capital expenditures of a company so this is the cash flow statement of google if you go down this says here net cash provided by operating activities and this is operating cash flow for 2020 google had an operating cash flow of 65 billion dollars and then if you go down here to investing activities you'll see in the first line purchases of property and equipment ppe and that is the capital expenditure this includes both maintenance capex and also growth capex and if you subtract 22 billion dollars from 65 billion dollars meaning this minus this will give you free cash flow so cash from operations minus total capital expenditures is equal to free cash flow all right let me go to the dcf calculator now you can find it on this website called buffett's books i have found this website and this calculator very reliable i've used a whole bunch of different ones and also my own calculator and i've seen that this one actually works very reliably so i always use this so these are the things that you have to input now what is your company's free cash flow and i'm taking the example of google and free cash flow for google in 2020 was 42 billion dollars so 42 42.843 so we'll keep it in millions and i've input this number right here 42 843 million dollars so we have the free cash flow now the next thing is growth rate and the growth rate that i take is i basically compare what the analysts are thinking and you can also hit this here estimate average growth rate and this will open this thing up here so you can actually estimate what the growth rate of this company has been in the last 10 years or so so net income in the past for google was nine seven three seven million dollars it's right here and this was in 2011 and in 2020 it had grown to 40 billion dollars 40 269 million dollars and that's what's here and then you type in the years and this gave me an average growth rate for google of 17 annually and another good thing about this calculator here is that if you do not have access to this page with all these numbers what you can do is you can actually put in the ticker of this company right here any company you are looking at and hit find and it will take you to the same morning star page and you will get all these numbers here what you can also do is you can see what the analysts think if you go to yahoo finance and go to analysis and go all the way to the bottom of the page here you see that the analysts think the growth estimates for google next five years are 16.95 which is very similar to 17 of growth rate that they have had in the past but i want to be conservative so instead of 17 i have gone down to 15 and make a note that you should always be as conservative as possible because these are estimations in the future no one knows what is coming in the future so the more conservative you are the safer you are now let's go down it asks you then what do you consider short-term so this is the time horizon that you want to estimate the cash flows for if you want to do it for the next five years or 10 years it depends on you so let's go with five years here it asks you the discount rate so this is the discount rate that i was talking to you about i generally keep it at 10 meaning i want a 10 rate of return from this investment i'll play around with this discount rate later on in this video to show you how it changes the intrinsic value now moving on further it asks you after the fifth year what percent whole number will the company continue to grow into perpetuity so this is the perpetuity growth rate that i explained to you the calculator already recommends to use three percent or lower meaning it tells you to be more conservative because the further out you go in the future the harder it is to estimate numbers so i leave it at three percent now moving ahead how many common shares are outstanding here you see shares in millions for google and as of 2020 they had 733 million shares outstanding and make sure that all these numbers are in the same unit meaning if this is in millions your free cash flow up here should also be in millions so i have kept everything in millions so it's fine for now so we can leave it at 733 million now moving forward it asks you what is the current stock price of the company that you were analyzing for google it is 2024 as of recording this video and then it automatically does all these calculations for you so it is based on the formulas that i explained to you before so future cash flow projection is this for the next five years and it is based on the future growth rate of 15 that we used in this example then it uses the discount rate and comes up with these discount factors and if you remember this formula this is how it does it one plus the discount rate of 10 in our example for the first year one plus discount rate raised to the power two for the second year one plus a discount rate raised to part three for the third year and so on and this is how it finds these numbers and then at the end it divides this by this and it gets these values so this now is your discounted cash flows and at the end it also does the discounted perpetuity cash flow again if you remember this is the formula for calculating that and it already uses this so you don't have to do again anything and you get the final discounted cash flow of 82 billion dollars discounted at the discount rate of 10 so this means the intrinsic value per share for google is 1457.
at a 10 annual discount rate that we used in this example so now this was when we use the discount rate of 10 meaning if we want to get 10 rate of return on our investment what if we want to get 15 now so if i put in 15 instead of 10 if i hit calculate you see that at a 15 discount rate the intrinsic value goes lower and that's what i told you the higher the discount rate the lower the intrinsic value will be and what this means is if you want to invest in google and want a 15 rate of return annually you should consider buying google around 794 dollars and now let's try 8 so we'll put in eight percent discount rate and hit calculate and now you see now it seems like google is fairly priced at two thousand one hundred dollars so it all depends on what you want and what kind of rate or returns you want and based on that your intrinsic value calculation changes so this is how you use discounted cash flow calculator and again let me know in the comments below if you really want to understand the actual calculation and want to set up an excel template for yourself and based on the demand i will make a video dedicated to that let me know in the comments below if something was not clear i'll try to clarify that and if this video was informative for you please consider leaving a like and subscribe to this channel investing untangled that'll help my channel a lot in the future i'll be bringing in more videos like this educational content about stock market research and also detailed stock analysis so stay tuned to my channel and i'll see you in my next video
Comments 0