The discounted cash flow (or DCF) approach describes a method of valuing a project, company, or financial asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give them a present value.

The discounted cash flow (or DCF) approach describes a method of valuing a project, company, or financial asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give them a present value. The discount rate used is generally the appropriate cost of capital, and may incorporate judgments of the uncertainty (riskiness) of the future cash flows.

Now I have developed a small script which can help you to find the fair value of stock provided you know the 3 parameters

- EPS or earnings per share.
- Growth Rate of company.
- How many years of such growth is sustainable.

Now the question comes how do you know all the data.

EPS would be very easy because you will get that in any finance site like moneycontrol.com / rediff money …

Now the most important thing is to get the growth rate of the company. One of the safe way is to keep that as 4 % but other one is, you can get EPS of previous years and based on them you can get the growth rate. Now keeping the no of years as 3 if you have 3 years old EPS and key in the EPS of previous years and checkout the EPS for the current year. Getting the best approx value would be the right and maintainable growth rate.

Now no of years would be your call because everything if is suggested by this small script then it would be GOD but then 3 years is always a better choice.

Note : * This is my script using DCF formula and if any share price does not hold correct instead of questioning me read the Disclaimer first.

Tannu says

Pls tell me how to value a firm having negative FCFF and FCFE

suman raha says

hello sir i am new in share market and i want to learn how to market works and how to make money from it.

please guide me..

Shabbir Bhimani says

Suman, I do the same thing on my blog and I will suggest you start here

Brian Leung says

Shabbir,

I wanted to point you to a DCF calculator tool that I built at

http://stockzoa.com/dcf . It automatically pulls free cash flow data from Yahoo! Finance to make quick DCF valuations a piece of cake.

Would love your thoughts on how to improve it and make it more useful for you?

Thanks,

Brian

Shabbir Bhimani says

Really Nice Brian but it does not work for Indian stocks because your field to enter the stock symbol is limited to few characters

Brian Leung says

I expanded the text field to 20 characters. Thanks for the bug report!

Here’s an example stock that I ran my DCF on:

http://stockzoa.com/dcf/LICHSGFIN.BO/MTImNyY1JjMm

I ran it with default values, so “garbage in, garbage out”.

Thanks,

Brian

Shabbir Bhimani says

Great to see that Brian.

t muscat says

I would like to know what formula you used to come to a fair value when you have not used the discount rate and future cash flow?

t muscat

Shabbir Bhimani says

DCF is mathematical forumla where you input numbers and you get output as fair price.

Taral says

Dear Shabbir.

My question is regarding PPF account. Is it possible for me to transfer my PPF aacount from a bank to a Post Office? If yes than where can i find transfer form online? please advice. Thank you.

Shabbir Bhimani says

Taral, I am not an expert about the process of transfer and so would not be able to help on the issue.

Taral says

Thank u Mr shabbir for your reply.

Shabbir Bhimani says

The pleasure is all mine Taral.

Ajay says

Dear Shabbir,

I want buy any stock MOVING AVERAGES 10,50,200 DAYS MOVING AVERAGES.

Some analyst told above 200 day moving average is healthy for market.

one week or day tradeing purpose which moving averages is good.

simple moving average or exponential moving average is good.

plz suggest me daily intraday tradeing stocks.

Shabbir Bhimani says

Again Ajay, you are doing the mistake of taking too much information which will not help you a single bit. If someone has told you something it should be with a reason. I did that in my book which moving average works why and how and should you use only a moving average or not. Check http://shabbir.in/ucp-book/ where I have the Table of content as well so you can understand what it will cover.

Ajay says

Dear Shabbir,

Thanq for good response.

BANKOFBARODA EPS =83.67.AS PER YOUR CALCULATOR AFTER 3 YEAR THE VALUE 1696.

IT IS RIGHT TIME TO BUY THIS STOCK.

Shabbir Bhimani says

Ajay, no matter what stock you choose only DCF should not be a good trigger to buy. It can be one of those many such triggers to be buying into stock.

Compare your numbers with the leader in the market and that can be a good comparision. Say compare it with SBI.

Also I will also suggest you to get my latest ebook ( http://shabbir.in/ucp-book/ ) because that will help you understand what is the right time to buy into stock and why Warren Buffet method of investment did not work for me.

Ajay says

Dear Shabbir,

ONE DOUBT ITC NOW EPS 10.64

AFTER 3 YEARS THE SHARE VALUE AS PER YOUR CALCULATION 215.

NOW THE SHARE VALUE IS 170 IT IS THE RIGHT TIME TO INVESTMENT THIS STOCK.

BUT BUFFET TOLD MARGIN OF SAFETY DISCOUNTED VALUE 2/3 VALUE.

FUTURE VALUE=215

MARGIN OF SAFETY 2/3 DISCOUTVALUE=143

is it correct or not.

Shabbir Bhimani says

Ajay, any mathematical calculation cannot be general on all sectors and all stocks. For some business 2/3rd can be good option but I will say not all. ITC has been around 170 for last few months and so you can have 2 views of looking at it.

1. It has a good support around 170.

2. It has done nothing beyond 170.

So though numbers are all ok you should also see the stock performance and charts.

I am not a fan of ITC because of their major business in tobacco and Govt intervention into this sector does not allow the stock price to do a lot.

htesh says

hey shabbir pls undestand i am not commerce student my friend thats why i am asking pls help

so pls answer my both questions properly nd in detail pls friend

how to compare dcf with peers you mean to say if dcf value of karuturi which i got as 11 is the least among pears its execellent buy?

also another question

Free Cash flow = Cash flow from operations + Net Capital Expenditure – Dividends paid (right?)

but tell me where will net capital expenditure figure in balance shhet and dividends in balance

can you tell me where will i get this values in balace sheet

also can you share which is the best portal for stock analyses where free cash flowe and dcf value is readymade given so that we dont have to do calculations manually

htesh says

how to compare dcf with peers you mean to say if dcf value of karuturi which i got as 11 is the least among pears its execellent buy?

also another question

Free Cash flow = Cash flow from operations + Net Capital Expenditure – Dividends paid (right?)

but tell me where will net capital expenditure figure in balance shhet and dividends in balance

can you tell me where will i get this values in balace sheet

also can you share which is the best portal for stock analyses where free cash flowe and dcf value is readymade given so that we dont have to do calculations manually

Shabbir Bhimani says

HTesh, I am not sure which balance sheet you are seeing but if you are not able to find some numbers on some balance sheet you have to be getting your commerce right.

htesh says

thats wht i am asking shabbir what is fair value of dcf

and what vale to dcf is considered to be good

dcf value share price of that stock

Shabbir Bhimani says

There is nothing called fair value for DCF and that is what I am trying to say. I think you need to read the complete reply. You have to compare the pricing of DCF with its peers.

htesh says

hey shabbir you are not undestanding what i am saying please read properly thanks

do you mean to say when dcf comes out to be less that market price of that share it is a good buy?

what coclusion you draw

like how we say if P.E < 15 its good buy and p.E above 30 is sell

same way what can you sy about dcf

what can you say ab the dcf value and how we can put in to propspect of valuating share of this specific parameter

awaiting eager reply

Shabbir Bhimani says

Htexh, there is no such general rule which you are quoting in stock market.

Now you can see lot of good stocks down to single digit PE and so all of them are not good buy but then they would be good buy if the bigger spectrum is good. i.e. sector, fundamentals of the company and other things.

If you think 15 PE is a benchmark for judging everything you are having issue in understanding the basics. Time and again I read the complete replies but what I am trying to tell comes as basics.

You cannot have every company painted with the same brush.

Now for DCF.

You have to use it with care.

Let us say that you are trying the calculation on one company but the comparison cannot be done based on any particular number but should be based on peer stock companies and things like that.

Let us say that I want to buy TVS Motors. DCF may look very good but the comparison should be done based on numbers of market leader in the same space i.e. either Tata Motors, Maruti or even M&M and not based on any mathematical assumption number or even any other companies like say Reliance or ONGC

I hope I have made myself clear.

htesh says

shabbir awaiting ur reply

pls

Shabbir Bhimani says

Please provide some time for me to reply

htesh says

how do u got to that conclusion

how did u analyse the value

do you mean to say when dcf comes out to be less that market price of that share it is a good buy?

what coclusion you draw

like how we say if P.EE and p.E above 30 is sell

same way

what can you say ab the dcf value and how we can put in to propspect of valuating share of this specific parameter

Shabbir Bhimani says

HTesh, There is no hard and fast rule but just a valuation process. See http://en.wikipedia.org/wiki/Discounted_cash_flow as well

htesh says

hi shabbir

i am a layman investor i can you explain me what is dcf is and how it helps to find value it simple terms and suggest me .i tried with karuturi global i put eps growth rate at 4 and years 3 and then i clicked on claculate and estimate button i got value as 11.58 now what is this value is it dcf and what does it suggest current price of karuturi global is 21 so what conclusion can i draw,please explain me in details.

also if you can tell me how to read cash flow statement with its significance it would be great help

i reaaly need your help shabbir

you can mail me at dipoct@gmail.com

Shabbir Bhimani says

Hi, DCF is a mathematical calculation for finding fair value of stock. It may not work in real life.

htesh says

hi would appriciate complete response.

pls read this

what is dcf is and how it helps to find value it simple terms and suggest me .i tried with karuturi global on ur calculator i put eps growth rate at 4 and years 3 and then i clicked on claculate and estimate button i got value as 11.58 now what is this value is it dcf and what does it suggest current price of karuturi global is 21 so what conclusion can i draw,please explain me in details

so is karuturi great buy then?

Shabbir Bhimani says

No not a good buy because this is just one indicator that it may be a good buy. There are lot of other things to be considered like volumes, peers, management, fundamentals and many other.

Yes considering only DCF yes it may be a good buy but as I said it is just a mathematical formulae.

Salahu says

Here is the formulae to find discounted rate for N th year:

(1+G)^N/(1+R)^N

Calculate for each year and get the sum of all discounted rates. For constsnt growth period, discount rates to be taken as 9.09* the last figure.

Shabbir Bhimani says

I also use the same formulae and so I will suggest if you can share the url I can see and compare my calculation. You can see my calculation here.

Salahu says

Shabir,

I cross checked with another website with the same data. There is a consider difference between that and yours. I think your calculation has some serious error. Please check.

I fed the same data and I got 1183.82 from the calculations memntined in your blog here. This seems to be very high and unrealistic. So I tried with another well known site and the result was 591.90. This figure is more nearer to the realistic figure.

Check for error inyour calculation.

Shabbir Bhimani says

Can you show me the site so I can see the calculations. There is dampening factor in my calculation which is constant.

Salahu says

Yes I do. It is very well explained in your post itself. I also referred few online guides also.

Usually DCF calculated with 10 years expected earnings. For example, in the case of GSFC, I took average EPS of this stock ( of previous years) and then consider its annual growth as 8%. Now, we consider earnings of this stock grows at 8% ever year for the next 10 years (This is the period widely recommended by many experts online and offline) and we consider the growth become zero or earnings remains constant from 11th years onwards. Now we got earnings for each year. Now calculate back wards to find discounted rates. Discount rate is taken as 11% ( the figure you have considered and widely used). Calculate discounted earnings for each year. This is the final earnings and now we have discounted earnings for next 10 years. The fair value of our stock ( In this case GSFC) should be less than the sum of all these discounted values.

Now comes to the example you have mentioned. You have taken 4% growth rate for just 3 years. I take the same data for calculation purpose. You have calculated EPS of next three years exactly. Now we need to discount these earnings at 11%. After that, take sum of all those earnings to arrive the value. If your share value is less than this value, then it is very well to consider to buy.

Salahu says

How did you calculate then, manually in excel sheet?

Shabbir Bhimani says

Salahu, I am not sure you understand the DCF formula at all. First I will suggest you see what this formula is all about at Wiki. After you understand the formula you can fit the parameters in the area and see the final calculated value. There is nothing like Excel or anything.

Salahu says

Shabir,

I used your system for GSFC ( EPS 58.52, Growth rate : 4% and years of growth to continue and then constant : 3)

The result I got from your system was : 1183.82

I think this figure is too high and there is some error in your system. In your calucluation, you have mentioned three years EPS with consistant growth of 4% every year for next three years. So we need to take the sum of all these three future earnings to check the current price is a fair one to purchase.

After 1 year(s) EPS = 60.86

After 2 year(s) EPS = 63.30

After 3 year(s) EPS = 65.83

TOTAL of 1, 2 and 3 = 189.99 ( This is the answer) How come you got 1183?

Shabbir Bhimani says

Total of 1,2,3 is not DCF

Salahu says

Interesting article. But can you clarify: How come EPS of a company determine the fair value of its stock? Stock value parameters change across industries and sectors.

In fact, your calculation uses the same methodology to all stocks ( I get the same fair value for different stocks that has the same EPS)irrespective of the sector or size they come under.

Am I right?

Regards

Shabbir Bhimani says

This is based on the DCF algorithm which does not take into account those parameters.

jihalpatel says

shabbir sir, i m a student of IT engeering and i have a project of making a website which advices an investor that on which shares he/she shud invest to get maximum profit… so can u plz send me som algorith which can calculate variations in the prices of shares by examining the historical data of stock market ? my email add is jihalpatel@yahoo.com

thanks in advance…

Shabbir Bhimani says

Hi Jihal, there is no one shot algorithm to rank the best and the worst stock or else all financial advisor’s job would be at stake.

Arvind Sinha says

For a simple algorithm i suggest you read the “The Little Book that beats the Market”.

A simple algorithm that can be applied for making a website.

Just require pe ratio, market cap and ROCE.

Shabbir Bhimani says

Can you share a link to that book in Amazon

Taral says

Thank u bunch Mr Shabbir for fixing the calculator.

Shabbir Bhimani says

The pleasure is all mine.

Shabbir Bhimani says

Taral, thanks for pointing that out and its fixed now.

Taral says

Mr shabbir u should check your DCF Calculator, its not woking. Appreciate it if u fix it.

mathews jacob says

PLS CORRECT.AS.

in the 2009..annual report mukesh is stated to have only 1.8 MILLION shares.THis belong to promoter category..and not general public..

how do you convert (math-wise) ..between promoter and public shares…pls explain…

Shabbir Bhimani says

1.5B+ shares is correct but when it comes to promoter stake of 1.8M shares I guess I am not sure but this would not be Mukesh’s share or else he could not be among the top billionaires of the world.

mathews jacob says

Mukesh of Reliance has 1.8 million shares.whereas the total public outstanding shares of reliance is 1.5 billion shares as of date .MUkesh holds 30% of reliance shares ..as per logical calcualtion, you would then that he has 30% of 1.5 billion=500 million shares….this is how i thought…

in the 2009..annual report mukesh is stated to have only 1.8 shares.THis belong to promoter category..and not general public..

how do you convert (math-wise) ..between promoter and public shares…pls explain…

mathews jacob says

Shabbir,

Mukesh of Reliance has 1.8 millionshares.whereas the total outstanding of reliance is 1.5 billion shares as of date .MUkesh holds 30% of reliance shares ..are his 1.8 “preferred” shares, so that they are converted to common stock by multiplication x 250, say..

if so then he actualy holds 1.8 X 250= 500 million shares…

Pls clarify…

Also , from India is it posssible to buy american shares, coke ,Microsoft etc…How and is it worth taking the risk..

Shabbir Bhimani says

Mathews I could not understand your calculation but about investing in foreign companies I once had thought of investing in Google but the way Rupee moved I would not do that anyway because all your profit can be wiped off with a 10% move in Rupee.

I have my own online biz which does very well when India Crashes because I get more INR for the same $$ earned.

mathews jacob says

THAnk you, Shabbir,

I notice that Stakes passon by inheritance, like MUkesh of Reliance has gifted small 2% stakes to his kids.

Sometimes, By INfluence(wasta, in arabic), Russian Abramovich, got a large 30% stake of Sibneft OIl, under the loans for shares program of Yeltsin, under privatisation .

Buffet , DCF method to spot undervalued …and then use Insurance cash from his GEICO,..to invest..is a third method.

Are these 3 (inheritance, Influence,,or DCF ) the only methods to get

Blue chip stakes …..?

Shabbir Bhimani says

There can be one, There can be many but the important thing is they are all bookish type of method and actual data can vary and so you should use them to find good stock but invest what you think has good future. This data work on past data but you are investing in future.

mathews jacob says

%STAKES SALE

Posted by : mathews jacob on 10/16/2009

For Finanzial wizards..

what is the best method of buying a 10% stake in a blue -chip like microsoft,coco-cola.exxon mobil?

Buffet advises buying undervalued stock..discounted..

Some S/w owners like moorthy of infosys gifts 2% stake,($300 million) to daughter.

Are these shares in Paper format, or computer DEMAT or as a title deed format..Pls clarify….

Shabbir Bhimani says

Demat Format but if you want to buy such a large stake you need to inform the exchange as times.

TIP Guy says

Shabbir,

A good and simple calc. You many want to include (1) discount rate as a variable, so that users can modify it (2) display result in graphical format instead of tabular data.

You have a good setup here.

Best Wishes,

Shabbir Bhimani says

Yes they are good suggestions and I would try to add them soon

Shabbir Bhimani says

I do not have it in downloadable format.

prasanta says

Sir, can you provide this calculator utility for download.

Thanks in advance

Shabbir Bhimani says

There are many algorithms to calculate the fair value of a share price and one of them is DCF. I would suggest you use any one of them to do it.

Using the algo is not important but when doing you should not only use the stock in concern but also use the same algo over other competitors stock and see which one could be underperformer / outperformer.

Thanks

Shabbir

Fathaulla says

Dear Mr. Shabbir,

We are a new company (JSC closed)and expect to make profit every year. Some of the shareholders want to sell their shares and would like me to calculate the share value for the company considering coming 15 years cashflow. Please advise.

Thanks

Shabbir Bhimani says

Check out the about page and you will find my mobile number.

singhboy says

also if possible pls me ur mobile no @ gindidhillon#gmail.com I promise im not spammer n wont reveal ur mobile no. to any1. Im 24 From punjab. i want to ask u sum questions on fundamental analysis. I emalied to many ppl online n posted in online forums but none could satisfy me. I guess less than 1% indian investors would have heard the term “Discounted cash flow analysis”. Not even my brokers (guys working in sharekan, hdfc securities and karvy stock broking) know anything about fundamental analysis.

singhboy says

hello shbbir dear. I read about Discounted cash flow analysis on investopedia. I want to learn this analysis tool but problem is that m not able to find required figures like capiatal expenditure ana ‘bete’ value of companies. Indian companies dont provide capital expenditure amount on their Cash flow statements. So will u pls tell me where to get these figuers from? also tell me how did u develop this tool to find out net present value of any company without knowing free cash flow and ‘beta value’ of that particular company? Do u use another unique method of Discounted cash flow and not which is described on investopedia.com?

Feroz says

The article should also include how P/E is calculated. As P/E is a ratio that investors throw around with confidence as if it told the complete story. Of course, it doesn’t tell the whole story (if it did, we wouldn’t need all the other numbers.) The P/E looks at the relationship between the stock price and the company’s earnings. The P/E is the most popular stock analysis ratio, although it is not the only one you should consider. You calculate the P/E by taking the share price and dividing it by the company’s EPS (Earnings Per Share that we saw above)

P/E = Stock Price / EPS

For example: A company with a share price of Rs.40 and an EPS of 8 would have a P/E of: (40 / 8) = 5

Shabbir Bhimani says

Today ofcourse because the Algo of DCF is if you have some growth parameters for some years you can calculate the fair price of the stock

libran_1234 says

the fair value calculated is what the price should be today or after three years

Shabbir Bhimani says

I have kept it as 11.

libran_1234 says

hey cool calci, however whats the discount rate in your calculation??