Last week I asked: what is a share price?
How do you determine if a share price represents good value or not?
I got a bunch of different answers.
For example, this from Greg:
“Which shares to buy? I buy for different (often terrible!) reasons. Eg, I bought Telecom because I hated Telstra so much. Bad decision! I bought Apple because I like my Mac so much and noticed that Dick Smith and Noel Leeming were selling them. Good Decision!”
Finding companies you admire is a good start, although no matter how good the company is it doesn’t make sense to buy shares if they are currently overvalued by the market.
He went on to say:
“My feeling is, in general, you really have no idea whether its a good price or not. And no way of telling.”
Really? Surely there must?
Chad explained one approach:
“To use a simple calculation…If a company is making $1 million in earnings/profits today, and earnings are growing at 20% per annum. Then it’s pretty easy to work out what the company should be making after say 5 years:
$1,000,000 x 1.20…x1.20…x1.20…x1.20…x1.20 = $2,488,320
Thus, in five years the company should be worth:
Earnings $2,488,320 x 12 (times earnings) = $29,859,840”
That makes sense. But, how do you know if 12x is the correct earnings multiple to use? As we’ve seen this number can vary quite a lot depending on the company.
What all of this shows is that people often have an opinion on whether the share price of a given company is too low or too high – but they usually can’t explain “why?” let alone determine what the price should be in any structured way.
Valuecruncher is a tool that allows anyone to find, create and share valuations for publicly listed companies.
Valuecruncher uses the same framework that is used by professionals: discounted cash flow analysis.
In simple terms this says a business is worth the present value of the cash that it will generate for shareholders into the future. To calculate these you start with the revenues a business generates and deduct all the costs associated with getting those revenues (including taxes and capital expenditures).
Up until now putting together the calculations and collecting the values you need to plug-into this sort of model has been too hard for most.
But, Valuecruncher is designed to make this accessible to everybody.
For a start the model is at your fingertips (complete with sexy graphs) – so there is no need to mess around with complex spreadsheets etc. It even give you a starting point for your valuation by automatically generating estimates for each of the key inputs. You can simply update these estimates with your own numbers and Valuecruncher will update the resulting valuation for you in real time.
You can also explore valuations saved by others, and drill into the assumptions that they have made around the future performance of the company.
As exciting as this all is, it’s just the beginning. We’ve started with the largest companies in the major world markets (S&P 500 in the US, FTSE 350 in the UK, the ASX 200 in Australia, the TSX Composite in Canada and the NZX 50 here in New Zealand). But, we’re hoping to soon extend this to a much wider set of public companies, including those in smaller markets which are typically overlooked by analysts.
And, there are lots of ideas for how we could use the tool we’ve created in other ways to help investors of all levels of experience.
But, before we get too far ahead of ourselves, we’d love for you to take a look, find some companies that you’re interested in (if you own some shares already that will be a good place to start) and save some valuations. And, then tell us: what do you think.
Some more information:
Some valuations that others have already created:
- Google: $487.70 by acoy (16% below the market price)
- Apple: $219.71 by lancewiggs (29% above the market price)
- Microsoft: $30.46 by KiwiEMH (slightly above market price)
- Air New Zealand: $2.55 by jeremy (nearly twice market price)
- Fletcher Building: $8.62 by tiger (below market price when it was saved, now above market price)
- Contact Energy: $12.36 by Bert (30% above market price)