2 Excel Templates
1) Creating a dashboard with pivot tables
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The model can be adjusted very easily to any company. Keep you posted for the rest of the templates.
2) Deferred tax assets and liabilities model
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Here are 2 Infographics for Today:
1) Mergers and acquisitions cheat sheet
Get this infographic on a high-resolution PDF
2) IFRS for Small and Medium Companies
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Here’s today’s “How to” guide:
How to Validate Equity Value Like Warren Buffett
Today, there is a lot of talk about stock value. Many companies are overvalued, and to conclude this, we don’t need to be financial experts.
It’s enough to notice, for example, if a company has a high P/E ratio, let’s say 70, while its sales growth is not particularly strong.
On a reasonable basis, we can question why the company is valued so highly. Such valuations can often result from certain speculations.
Similarly, we can identify companies that are undervalued.
Value investing, popularized by legendary investor Warren Buffett, revolves around identifying undervalued stocks based on intrinsic value rather than market speculation.
Buffett’s approach draws heavily from Benjamin Graham’s principles, emphasizing a company’s fundamental metrics, growth prospects, and ability to generate cash flows.
A powerful tool to complement value investing is the Reverse Discounted Cash Flow (DCF) analysis. This method allows investors to validate a company’s current market capitalization by reverse-engineering the implied growth assumptions baked into its stock price.
Here’s how you can apply the reverse DCF to assess whether a stock is fairly priced, overvalued, or undervalued.
To perform a reverse DCF, we first need to understand the DCF method. I wrote about this in a previous newsletter. If you haven’t read it yet, you can check it out HERE.
In the following example, I analyzed the top 7 companies from the S&P 500 index. While it’s undoubtedly better to evaluate each company individually, in this case, I aimed to assess how these companies perform on an aggregate level to partially estimate the intrinsic value of a significant portion of the S&P 500 index.
For 2023 and 2024, I used historical values based on the latest available data from Yahoo Finance.
The total market capitalization for these companies amounts to XXXXX, with a total EV/EBITDA ratio of XXX, which, we must admit, is exceptionally high.
Here was my key idea:
I wanted to examine how much these companies’ revenues from sales would need to grow over the next 15 years—by the year 2039—assuming all other parameters remain unchanged (e.g., cost of capital, FCF margin, long-term growth rate), to justify their current market capitalization.
What did we find?
We found that, by 2036, sales would need to reach XXXXXX, which is XXXX times greater than current sales levels.
Is this realistic?
We know that behind every sale are consumers. The question I’m asking is: who will pay this much money?
While this is just a rough estimate, it can still serve as a valuable tool for drawing conclusions. Ultimately, it’s up to you to make your own subjective assessment.
This is not investment advice but merely an illustration of how you can validate a company’s value.
