The key to valuing a business is to forecast how much of cash flow you will have in hand for next few years and to discount that cash flow in terms of today's dollars. $100 today is not the same as $100 in 5 years. If someone tries to sell you a security that is worth $100 in 5 years and promises a 5% annual, risk-free return rate, you'd pay $78.35 for that security today which will bloom into $100 in 5 years at an annual rate of 5% compounded!
As Warren Buffett has famously said,
"Price is What You Pay, Value is What You Get"
The same principle applies when you are valuing a business (stock of a business). If a business promises to generate a certain amount of dollars in cumulative cash flow in the future, you would want to discount that cash flow in today's dollars assuming you want to get a certain percentage of annualized return rate. You definitely would not want to pay for future cash flow as the face value (because that ensures a solid 0% return given your assumptions about the company are correct). Now, assuming that the company you are evaluating will still be in the business after your analysis period, you'd calculate the terminal value of a business by using the terminal growth rate and add that to your fair value calculations as well. This tool assumes a terminal growth rate of 2.5% with the user option to change it with each analysis. The terminal growth rate suggests that when the company reaches maturity, it will likely grow at the long-term growth rate of the economy.
Currently, this tool runs a Discounted Cash Flow (DCF) analysis to calculate the fair value of a stock. In the future, more models will be added such as "Earnings Per Share Based Model", and "Dividend Discount Model (DDM)". Theory behind the DCF model is explained here
No model or technique is perfect and nothing is going to give you an exact price at which a business should be bought. What this model helps with is getting you closer to the true value of a business while taking your assumptions about the business at face value. This should not be relied on as the only data point you look at before making your financial decisions.
This tool also has a functionality where, for the current stock price, how much of revenue growth (keeping the assumed free cash flow margin and required rate of return constant), or what free cash flow margin (keeping the assumed revenue growth and required rate of return constant), or what required rate of return is priced into the stock is calculated after each fair value evaluation.
For example, if a company stock's fair value is $62.8 for assumed revenue growth of 12%, free cash flow margin of 25%, and required rate of return of 10% for the next 7 years but it is trading at $445.15. To justify the current stock price of $445.15, Either,
This company would have
to grow at a 52.05% average annual rate for the next 7 years or have a free cash flow margin of 176.98% or give you a 3.65% annualized return for the next 7 years compared to assumed 10.0%
Some quick notes. DCF models do not value bank stocks well. For banks, multiples of their book value are a preferred way of valuation. Do not get carried away with assuming unrealistically high growth rates especially when you are applying that rate for several years in the future. Some companies do not have their data available online and in that case, this program might throw an error. Please open up the issue and I will look into that.
- Graphical User Interface
- Installation
- Usage
- Arguments
- Examples
- Upcoming Features
- Contributing
- License
Graphical User Interface (Download for Windows) (Download for Linux)
Introducing the new graphical user interface (GUI) for Intrinsic Value Calculator tool that is cross-plateform and is distributed as an executable for users who want to get straight to the company fair value calculations! Please find that executable package here. Alternatively, users who want run the program and GUI using terminal can follow the next steps in the readme file. Here's what the GUI looks like (yes, there is a dark mode!).
Using it is very straight forward. All it asks from the users is the ticker, revenue growth assumption, and free cash flow margin assumption. User can also change number of years [to forecast in future for calculation of the fair value], discount rate [also knowns as weighted average cost of capital], and terminal growth rate [the growth rate when company becomes mature] fields. Default values of which are provided just as a starting point.
Populate Info button populates the last 3 years of revenue growth, share buybacks, fcf margins, and analyst forecasted growth rates for user's knowlege. Also, it populates some of the liquidity data for that stock in the right column. So if you just input the ticker symbol and press populate info, you can look at all that data about the company before making an educated guess about rest of the input fields. Once you are ready, press the Calculate Fair Value button to get the Fair Value per Share as well as precentage upside/downside based on current price for the selected company based on your assumptions. It also calculates what the yearly revenue could be in N years if you revenue growth assumptions are right. Also look at the other fields that try to justify the current price of the stock using some what-if analysis.
Feedback is very much appreciated. Please open up an issue with the feedback/problem and I will respond to you as soon as I can.
- Clone the repository to your local machine:
git clone https://github.com/akashaero/Intrinsic-Value-Calculator.git
cd Intrinsic-Value-Calculator
- (Optional but Highly Recommended) Set up a virtual environment or conda environment to isolate the dependencies:
python -m venv stonks # Create Virtual Environment
source stonks/bin/activate # Activate For Linux/macOS
stonks\Scripts\activate.bat # Activate For Windows
or for the Conda environment
conda create --name stonks
conda activate stonks
- Install the required dependencies:
python -m pip install -r requirements.txt
There are two modes users can run this tool in.
If you want to get started quickly or just have a handful of stocks to evaluate, this mode is best to stay in. To evaluate a stock's fair value, run the following command with your assumptions
python get_fair_value.py <ticker> <future_revenue_growth> <free_cash_flow_margin> --N <number_of_years_in_future> --rrr <required_rate> --tgr <terminal_growth_rate>
Here, the only mandatory arguments are ticker, future_revenue_growth, and free_cash_flow_Margin.
- ticker : Stock ticker of the company you want to evaluate
- future_revenue_growth : Assumption about the future revenue growth for the next N years
- free_cash_flow_margin : Assumption about the future free cash flow margin for the next N years
- - -N (Optional): Number of years for which you want to forecast revenue growth and free cash flow margins (Default 7)
- - -rrr (Optional): Required rate of return (Default 10%)
- - -tgr (Optional): Terminal growth rate of a company (Default 2.5%)
Here's how you can use this tool for stock evaluations
# Example 1: Single stock valuation mode
python get_fair_value.py MSFT 12.05 28.3
or
python get_fair_value.py MSFT 12.05 28.3 --N 8 --rrr 10.25 --tgr 2.7If you want to evaluate the fair value of multiple stocks in one go, you can run this tool in batch mode. All you need is a CSV file with 3 columns in following format (look at example file in ./batch_mode_files/example.csv).
Stock_Ticker , Rev_Growth_Estimate, FCF_Margin_Estimate
Value 1-1 , Value 2-1 , Value 3-1
Value 1-2 , Value 2-2 , Value 3-2
Value 1-3 , Value 2-3 , Value 3-3
Value 1-4 , Value 2-4 , Value 3-4
. . .
. . .
. . .
Value 1-N , Value 2-N , Value 3-N
The tool has an argument that allows users to use a list of stock tickers and build the CSV file by interactively providing revenue growth and free cash flow margin estimates.
python batch_mode.py <csv_file_name>
csv_file : CSV file with revenue growth and free cash flow margin assumptions in the "./batch_mode_files" folder
or
python batch_mode.py --gen_file <ticker_text_file>
- -gen_file : Switches on the CSV file generation for batch mode ticker_text_file : File of ticker list in "./ticker_groups" folder
# Example 1: Generate csv file for batch mode evaluations (Optional).
python batch_mode.py --gen_file example.txt
# Example 2: Run the tool in batch mode
python batch_mode.py example.csv
- More financial models are being worked on including the "Dividend Discount Model", and "EPS based Fair Value Model"
If you'd like to contribute, please open up a pull request and if it is addressing any issues, please state so clearly. All contributions are very welcome!
GNU LGPLv2.1 License
GNU LGPLv2.1 License © Akash Patel