Hey guys it's sasha, so you want to go and invest in the stock, but you're. Not sure. If now is a good time to buy, is the share price low? Is it undervalued or is the share price right now too high? Is the stock overvalued at what price would you actually buy hannah? What price would you sell is ten dollars? A good price is fifty dollars. A good price is five hundred dollars, a good price.

How do you know? How do you actually decide? Well, the secret answer to all of these questions isn't being able to calculate the intrinsic value of a stock. This is the price that you think the share price should be the fair value if you'd like, if the actual share price is then lower than the share price that you might want to go and buy, because it's a decent value option if the share price currently Is higher that you might go and choose and sell now that sounds simple enough, but how exactly do you actually go and calculate this intrinsic value? Well, this is one where everyone has their own unique way of doing it. There are lots and lots of different methods. Some of them more complicated, some of them simpler, but let me explain the most popular ones that people use very very quickly and tell you what the pros and cons of these different ones are.

The best thing is that most of these are not very complicated in terms of they won't take you huge amount of time to do, but there's still a few things that you need to be aware of. The two most common methods are using an earnings per share. Multiple or any other similar, multiple i'm going to get to that in a second and a top down discounted cash flow model. I'm also a big fan of a different approach, which is a bottom-up present value model.

But let me explain what these are in: exactly how they work first off. Let's start with the earnings per share, multiple method and, let's start with the trailing version of it, because there's two versions: this is a very quick calculation that is particularly popular for very mature, established companies as a way of valuing them. This certainly isn't the way that you would ever want to value a younger startup or a company that hasn't been about for very long. All you need to do to use this method is to go and google your stock ticker.

Let's take walmart, for example, when you look up the stock, there are a lot of figures, but you only really need to know two of them. Look at the earnings per share. That's diluted the eps for the past year for walmart it was 4.75 over the last financial year. Next, you will need to use a multiplier, and this is where this approach gets really iffy, despite it being so popular, everyone will tell you to use a different number.

Some will use the average of the actual multipliers over the 12-month period during which their earnings per share was earned. Some will use the latest one in the latest quarter as the most recent version of that, and some people have incredibly complex formulas based on the company's growth trajectory. But if you go and use the trading pe ratio of 29.92 as per yahoo finance, just for the sake of the example, you'll then get a share price of 142., which is pretty much what the share price at the moment is now. There are two big problems with using this approach.

The actual answer depends entirely on the multiple you use and if you use a multiple based on the past actual share price, then you're not really doing a forecast you're more like calculating what the actual fair share price was for the last year. Instead, you also don't properly account for any kind of future growth. Sure then, multiple should sort of bake them in and include them, but this is a really bad and a highly inaccurate way of doing it, which brings us to the slightly different way of calculating intrinsic value, which uses a forward multiple. Instead, here you do.

The exact same earnings per share calculation, but instead of using last year's earnings per share, you will estimate what you think that earnings per share number will be in the future. So, with the same walmart example, if the current earnings per share is 4.75 and you estimate that the company will grow, for example, at 10 per year, this is by no means my forecast or something that i actually think will happen. I am just giving you a simple example: um then the eps number for walmart would be 5.23 next year and the year after that they continued along the same 10 gross trajectory. It would be 5.75 and so on and so on.

Now, if you use next year's number, you would take that 5.23 and then decide on a multiplier. You can use predictions by other analysts or make up your own. So instead, for example, you could use the multiplier of let's say 25 and then you'll multiply 25 by 5.23 to get 130.75 at the end of the day. The same issues remain with this approach.

As with the last one, you are still basing evaluation on what happened in the past, with very minor adjustments, there's almost zero actual accounting for how the future will be different and the multiple itself is still very much a guess and a small error in that multiple Will yield a very big error in your final share price calculation. There are more complicated ways of doing this calculation by discounting future values by doing the exact same process, but adding a little bit more complexity, but they largely achieve the same thing now. The preferred method for many financial analysts that operate in this space is to use something a little bit more complicated to use a top-down dcf model. These offer a lot more than just using a multiplier and they are relatively quick to do, but they suffer from the same problem as the previous methods.

You are still basing almost all of your future calculations from the numbers of the performance of the company. From the past sure you are increasing them by percentage every year. You know you're increasing the growth of your different metrics by a fixed percentage every year, but it's very hard to guess what that percentage increase should be, especially when a company is going for a rapid growth stage or is very early on in the process of developing And growing their business, a dcf model, basically extrapolates key company financials into the future, usually for a five-year period, sometimes for 10 years, depending on which company or which analyst it is, it will take the revenue and profit lines ebitda, for example, which is the earnings before Interest tax, depreciation and amortization: it will then do a forecast of some of the balance sheet items, things like capital expenditure, tax, due depreciation and any movements in working capital, and then it will work out what the free cash flow number is at the end. Essentially, this is a way of calculating how much real cash the company will be getting directly and indirectly via different kinds of assets at different points in the future.

The model will then make an estimate of the residual value of the company at a point in time. At the end of this forecast period, so if you're doing, for example, a five-year model, then it'll work out what the residual value at the five-year period is in an ideal world. You wouldn't need to do this and you'll just build a dcf model that forecasts 100 years or 200 years in the future. But the likelihood is that your numbers for years, 99 and 100 will be so wildly inaccurate that it will just not make any sense.

So you might as well make a single assumption, which kind of covers that entire period tail period at the point, when you stop doing actual forecasts, the model will then do the exact same discounting process as what i talked about earlier, and this takes all those free Cash flows and discounts them, hence the name dcf discounted cash flow, and then it just adds all of that up. So what you now have is the present value of all the money. Essentially, the company will earn at any point in the future and then, if you go and take that money and divided by all the different shareholders you're going to get to the value of each year. So to do that.

Just go and take that total divided by the number of shares and hey presto, you have your share price target. The downside with dcf models is that all of your predictions are ultimately based on what happened in the past. Next year's revenue is most often just last year's revenue with a little extra phone on top. For example, you just multiply by one plus 12 percent, but what if the company is still young, what if the company doesn't have revenue to speak of at the moment? What, if it's very small, this is where the most complicated method would usually come in, which would usually produce slightly more accurate and better potentially results.

You would build a bottom-up present value model. I won't go into the full details here because two reasons - one it will take way too long and two you would do a very different way of building one of these models for different companies. But let me cover the basics: the basics. Are you have to work out how the company is going to make the money not how much it's going to make, which is the bottom up versus the top-down model? So if you want to understand the value of the company, that's going fast like, for example, tesla or if you want to value a company that hasn't sold a single product yet like, for example, lucid.

Both of these i personally haven't invested in then, would essentially go and build your own p l forecast how many cars will they sell? When will they sell them at what price will they sell them? Where will they sell them? What are the costs of developing designing and building these cars? What are all the different fixed costs, internal transportation, blah blah, whatever all of those kind of costs? How much will the company have to reinvest in the business at which point sometime and why so? This involves a huge amount of modeling, a huge amount of digging a huge amount of trying to make assumptions about things that maybe it is very difficult to make assumptions about. And then you basically go and once you've built that entire model you're saying like this quarter or this month or this year, this many cars be produced here, and these are the margins, and these are the costs associated. You add it all up. You multiply things that need to be multiplied, and you add it together.

I actually have a whole video where i go through an example of this model for tesla, so feel free to go and check it out up here or in the description below now to get to the actual share price. Using this method, you do the exact same thing as you do with the dcf model, you're going to add up all of this money that you're forecasting for the companies make at all the different time horizons in the future. You then go and discount them to get the present value of them, and then you again just divide by the number of shares in the company and that's how you get your target per share valuation. I hope you guys found this useful.

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