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FORUN Technology Research and Advisory ___________________________________________________________________________ |
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About the model This is a two-stage growth model. It is assumed in this model that after the dynamic growth, the company enters into a steady state growth stage in which its earning growth is dictated by retained earning and equity return given by market average return on equity. The model provides the Intrinsic Value per share based on your required return and expected years of dynamic earning growth (YODEG). It also provides the needed YODEG to justify the current stock price. When the pink items have inputs, it also calculate the needed profit margin to avoid short term negative surprises. About the color coding Colored fields are for user input, based on factual data or your best estimates. Blue are necessary inputs, while pink and green are optional. Black indicates the result of calculation. How to use the model Enter a price in the blue color region, and check the output in black numbers. If at the entered price, the company's P/E/G ratio is much higher than you like and the needed Years OF Dynamic Earning Growth (YODEG) is much longer than your reasonable judgment, the company is overvalued. If at your expected YODEG and required return, the Intrinsic Value per share is much too low compared to the current stock price, the company is overvalued. Check the reasons why there is a premium before you commit your money. Be sure to check if the consensus EPS is reasonable or not. If the profit margin needed is much higher than historical average or recent actual, better check why before you commit your money. This is an excellent way to avoid short term disappointment. Note also that you need to use expected number of shares corresponding to the time of EPS. Nowadays there are too many companies that are increasing their number of shares quite rapidly. What all these numbers mean to you and your money? 1. Price, stock price per share. 2. FY EPS, estimated earning per share for the year to be ended. 3. Earning Growth Rate: estimated annual earning growth rate for future five years. 4. Forward P/E, a price to earning ratio. It is the ratio of current stock price to the per share earning for the year to be ended. 5. P/E/G, the so called PEG ratio, is the current price divided by the next year earning, divided by the earning growth rate in % for the next five years. In other words, if the company's P/E ratio is 20, and its earning growth rate is 20%, the P/E/G ratio will be 1. 6. Shares (M). Number of shares in million at the end of the FY to be ended. 7. Sales (FY $M), estimated sales in $M for the FY twelve months. 8. Profit margin, is the net profit to the company for each dollar of its sales. Input most recent quarters' actual or average. 9. Margin Needed, is the profit margin needed to match the estimated EPS with the estimated sales. 10. Required Return: your required return target. 11. YODEG expected: your expected Years of Dynamic Earning Growth for this company. 12. Intrinsic Value: intrinsic value per share based on your required return and the expected years of dynamic earning growth. 13. At IRR: implied rate of return 14. YODEG needed: years of dynamic earning growth needed to justify the current stock price at the implied rate of return. This number is calculated by assuming that the company's earning to grow at an annual rate represented by the five year consensus growth rate. Long time of dynamic growth period (big YODEG) indicates a bullish outlook the market is given to the company. However, judgment call is needed for sound investment.
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