Have feedback on this article? Concerned about the content? Get in touch with us directly.Terminal value helps professionals determine the long-term value of a company or project. Simply Wall St has no position in any stocks mentioned. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. We aim to bring you long-term focused analysis driven by fundamental data. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. This article by Simply Wall St is general in nature. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered! Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business.
Risks: Take risks, for example - Cisco Systems has 3 warning signs we think you should be aware of.įuture Earnings: How does CSCO's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. For Cisco Systems, there are three important aspects you should consider: Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. The DCF model is not a perfect stock valuation tool. Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. Beta is a measure of a stock's volatility, compared to the market as a whole. In this calculation we've used 8.0%, which is based on a levered beta of 0.959. Given that we are looking at Cisco Systems as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt.
The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance.
Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The first is the discount rate and the other is the cash flows. The calculation above is very dependent on two assumptions. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Relative to the current share price of US$47.2, the company appears about fair value at a 18% discount to where the stock price trades currently. The last step is to then divide the equity value by the number of shares outstanding. The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$242b. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.0%. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. The second stage is also known as Terminal Value, this is the business's cash flow after the first stage.