Fair Value Calculator

How to use the calculator?

This is a simple discounted model calculator to help you find the fair value of a company. With a few simple values, you can estimate the rough intrinsic value of a stock. The calculation consists of the following key values:

1. Growth Rate: It is the expected rate at which the company will grow in the upcoming years. Keep a realistic growth rate for efficient calculations.

2. Discount rate: The discount rate is usually calculated by CAPM (Capital asset pricing model). However, it can also be considered as the individual investor’s required rate. This means that many investors use the discount rate as the rate of return that they want to earn from the stock. For example, let’s say that you want an annual return rate of 12%, then you can use it as the discount rate.

3. Terminal Growth Rate: No company can grow at a fast rate for infinity. Terminal growth rate represents an assumption that the company will continue to grow (or decline) at a steady, constant rate into perpetuity, after the forecasted growth years. The terminal growth rate of a company can typically range between the historical inflation rate and the average GDP Growth rate. We suggest keeping the terminal growth rate 3-4% or lower.

Total Intrinsic value: This is the fair value of stock and equal to the sum of growth value and terminal value.

Always look at the fair value of the company before investing. If the total intrinsic value of a company is greater than the current market price, the stock is undervalued. Otherwise, it is overvalued.

Example – How to USE Fair Value Calculator!!

Quick Note: This calculation is only for educational purposes and should not be considered as a recommendation/advisory. 

Let’s say you want to interested to invest in the shares of ITC. We’ll find the Intrinsic value/fair value of ITC using the above FAIR VALUE CALCULATOR.

The current share price of ITC is Rs 209 (March 2021). During the trailing twelve months, the EPS (TTM) of the company is Rs 10.59. You can find the TTM EPS of any publically listed stock at Trade Brains Portal. Simply, go to the portal and search for the company. You can find the TTM EPS on the current key metrics section.

Next, you need to do is to find the projected growth for ITC. Again, on the Trade Brains Portal, you can find the growth rate in Revenue, Net Profit, etc on the stock details page. For ITC, its Net Profit has been growing at a rate of 14.06% (CAGR) for the last three years. Let us take assume a conservative growth rate of 12% for the next 5 years for ITC.

After that, you need to find the terminal growth rate. Let’s say assume its terminal growth rate is 3.5% after the previously forecasted 5 years growth rate.

Finally, you need to find the discount rate or return rate. As ITC is a large well-established company, we should not expect a very high return rate on this stock, as we might do if we pick a small or mid-cap stock. Remember the thumb rule of High risk, High return, and vice-versa. Therefore, being a large-cap (blue-chip) stock, we can consider a decent discount rate of 11% on this stock. 

Overall, here are the values to be used in the calculations:

  • Earnings per share = Rs 10.59
  • Return rate (%) = 11% 
  • Growth rate (%) = 12%
  • For the period (years) = 5
  • Terminal growth rate (%) = 3.5%

From the above calculations, you will get the intrinsic value of ITC is equal to Rs 207.10.

You can buy the stock at this price. However, you also need to have a margin of safety on your calculations to avoid the downside risk. After all, the future of any company is unpredictable and these calculations are made on few assumptions. Therefore, let’s consider a margin of safety of 10% on the calculated value. (Quick note: The higher the margin of safety, the safer is the investment.)

Overall, the intrinsic value per share for ITC after the margin of safety of 10% is Rs 186.39. Your purchase price should be below the intrinsic price for a “Value buy”. However, you can consider (+10%, -10%) of the IV in the purchase range.