Beta is a measure of a stock's volatility, compared to the market as a whole. ![]() In this calculation we've used 9.4%, which is based on a levered beta of 1.175. Given that we are looking at FIH group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The first is the discount rate and the other is the cash flows. The calculation above is very dependent on two assumptions. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Relative to the current share price of UK£2.6, the company appears around fair value at the time of writing. The last step is to then divide the equity value by the number of shares outstanding. The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is UK£31m. We discount the terminal cash flows to today's value at a cost of equity of 9.4%. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.2%. We do this to reflect that growth tends to slow more in the early years than it does in later years.Ī DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:Īfter calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. In the first stage we need to estimate the cash flows to the business over the next ten years. Generally the first stage is higher growth, and the second stage is a lower growth phase. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. ![]() View our latest analysis for FIH group What's The Estimated Valuation? ![]() Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Don't get put off by the jargon, the math behind it is actually quite straightforward. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Today we'll do a simple run through of a valuation method used to estimate the attractiveness of FIH group plc ( LON:FIH) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Industry average of 52% suggests FIH group's peers are currently trading at a higher premium to fair value Using the 2 Stage Free Cash Flow to Equity, FIH group fair value estimate is UK£2.50įIH group's UK£2.60 share price indicates it is trading at similar levels as its fair value estimate
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