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.

We’re hoping the change that, with a new website which we’ve been working on for the last few months:

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:

9 thoughts on “Valuecruncher”

  1. Hey Rowan,
    that is a cool site, I must have a bigger play. Good stuff.

    My point with “My feeling is, in general, you really have no idea whether its a good price or not. And no way of telling.”

    is that you, at any given time, have no idea what the market has used to calculate its current price. Since the vast majority of trading is done by large buyers, hedge funds etc., discounted cash flow will probably be already factored in.

    Or maybe not. Who knows?

  2. This is looking very cool, I was with Mark when we grabbed a spot with the google biz dev mgr on Friday, and he seemed to really click with this quickly…

  3. This is a great tool. Just by thinking about valuations instead of news and speculation will help many people to make better investments.

  4. Chad, the only problem is that buying shares based on valuations doesn’t necessarily help people make better investments. It just gives them smarter reasons to say why they their lost money.

  5. A share price is simply what the market is willing to pay at the time. It may, or may not, reflect the true, inherent value of the business.

    No one on here is talking about quality of management, products, point of difference, durable competitive advantage, market share, ethics, brand and reputation. Yet all these things weigh heavily on future success and cannot be found on the balance sheet.

    That aside, Valuecruncher looks great. I’ll sneak a mention into our next newsletter, I can see our customers loving it.

    If you send me a tower ad and a bit of info I’ll put it into our recently introduced educational area and happily send traffic to you for free.

    Kind regards

  6. Julian said…
    No one on here is talking about quality of management, products, point of difference, durable competitive advantage, market share, ethics, brand and reputation. Yet all these things weigh heavily on future success and cannot be found on the balance sheet.

    No, the fundamental theory of economics (CAPM and APT) stated that everything (major factors) that affects the value of a financial asset/s are already incorporated in its price. Sure, not every bit detail conform to CAPM/APT, but there is evidence that it does. So, whatever management styles, product types, brand, blah, blah, from a financial asset, they are reflected in the price.

  7. Valuecruncher has a nice functionality there. DCF is good for valuation of a single stock. It is not appropriate to portfolio (many stocks or many financial assets) valuation. This means that buying a group of undervalue stocks using DCF, doesn’t guarantee that the risk is minimized while returns is maximized. This is where Modern Portfolio Theory (MPT) comes into play. MPT seeks to minimize the risk and maximize returns via efficient allocations of funds into each stocks/assets in the portfolio. MPT stated how much proportion of the total fund that goes into each stocks/assets that will minimize the risk and maximize returns for the whole portfolio. Harry Markowitz & William Sharpe won the Economics Nobel Prize of 1990 for the pioneer work in the development of MPT. MPT algorithms are widely adopted by analysts in fund managements and other financial institutions.

    There have been some other recent robust models that have been developed to supercede the original Markowitz MPT, such as Black-Litterman Model, which was first developed at Goldman Sachs and a few more. I have already implemented these widely adopted models , Markowitz MPT and Black-Litterman , but since they’re both static, I will add another one which is a dynamic portfolio allocation model ,ie, one that is adaptive in that it updates itself in realtime as new information regarding the market arises.

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