How to find a stock's right price?
4.2.1. Valuation for a company
Let us understand how MoneyWorks4me arrives at the MRP and Discount price of a stock-
Price is the investment that we make in the share. In return we can get money in two ways:
(a) 'Future Dividends'- This is the Dividend income during the holding period of a stock
(b) 'Future Price'- This is the Stock price at the time of sale
Therefore, Future Value of a stock = Future Price + Future Dividend
We all know,
Due to inflation, the value of the money we pay as a price while buying the share today is not equal to the value of the money we will receive some years later when we sell the share.
Considering our expected returns and inflation, MRP is the maximum price we should be willing to pay for the share today, which will grow in the future at our expected rate of return.
To calculate MRP we need to know the Future Price.
(1) Future EPS can be estimated from the current EPS by using the compounding formula i.e.
Here, it is important to estimate the expected EPS growth rate of a company. At MoneyWorks4me, a team of experts analyse the company's past performance & future plan, market share, government policy, industry outlook, etc. In the end, after a thorough analysis, they come up with an expected EPS growth rate.
(2) Let us understand the relation between MRP and Future Value of a stock in terms of the compounding formula-
Where, FUTURE VALUE= Future Price + Future Dividends
(3) So MRP can be calculated by the following formula
Once again, a thorough study of the historical trends of PE ratios as well as dividends is involved. We have a special MoneyWorks4me method of calculating the future PE which we call 'rational PE'. It depends on the inflation rate, expected EPS growth rate and expected rate of return.
So to summarize, to calculate the MRP of a share we need
- Current EPS (which is known)
- Expected EPS Growth rate (which is calculated by the team of experts at MoneyWorks4me)
- Expected Rate of return (what you want, MoneyWorks4me Default - 15%)
- Future PE Ratio (which is calculated by the team of experts at MoneyWorks4me)
- Future Dividend per share (which is calculated by the team of experts at MoneyWorks4me)
- The research includes a thorough quantitative as well as qualitative analysis.
- The quantitative analysis includes scanning through the past 5 years data of each company. This is followed by a study of the future prospects of the company.
- The two combined together with our model based on Expected Earnings growth rate, Future P/E & dividend discounting helps us derive an MRP & Discount Price for each stock.
