Short blueprint for valuating stocks
This valuation method was created to see if there is any value in a stock. It evolves and is reiterated with time.
The stocks that are discussed in the “Articles” section use these methods. It’s nothing new or fancy. The point is to be as optimized and straightforward as possible to scan any stock very fast.
Use it or parts of it if you like. It was mostly made to give my investing an edge. Some is based on what Buffet says. You maybe know most of it already.
Table of Content
To be continued
Stock parameters to plot and look at:
- PE-value over time
- PB-value over time
- PS-value over time
- Cash flow over time – Negative and Positive plus the average.
- Assets over time +- goodwill
- Dividend over time
- Long term debt
- CEO – lenght and experiene
- Bord Director – length and experience
- Technical levels
- Market forcast 10 year ahead
1. Cash flow
- in stock valuation
What is cash flow?
1. Cash (flow) from operating activities (CFO)
CFO is the most interesting cash flow and what most people mean when they say cash flow. It shows the cash in from sales minus cash paid to suppliers, interest paid on debt and paid taxes. Basically the operating profit.
It is important that this cash flow grows year by year. It gives a growing business. But how much do we want it to grow year by year? What is the average and what is considered good? Is there some type of ratio to look at?
2. Cash (flow) from investing activities (CIO)
Why to look at cash flow?
Why it is important to look at a companies cash flow, ie. the historical cash flow, is to predict future cash flow or to see if the company is undervalued.
Sometimes investors tend to have their eyes fixed on more trending areas and miss the less trending businesses. Companies can be discounted due to this.
Why is a strong cash flow good?
It is important to compare the cash flow of a business against competitors in the same segment too.
Cash flow ratios.
Cash flow vs stock price, inventory, costs, average growth per year
What is a good cashflow?
First of, it is very likely that a positive cashflow is better than a negative: The cash into the business covers the cash out for expenses. However, the expenses
Historical cash flow to predict future cash flow
Forecasting exact cash flow is hard. There can be a interruption in the market plus many other changes and factors.
One more accessible way to predict cash flow is to make a trendline from the previous years and thereby expect what it might be in the future. But here you just assume all will continue as has and you are not taking in technological changes. new competitors etc.
There is a rule that says that the longer a company has been in business, the less likely it is to go out of business. Here it could be the same for evaluating the cash flow. The trend 10-20 years back, with low fluctuations, might also continue for the coming 5 years. Here things might also depend on the market segment and the size of the company of course. Eg, Coca Cola vs a smaller silver miner. The price and market share for the sugar drink will be about the same and it will continue to be sold following the same trend as before. However, the value of the silver on the world market can swing 2-5 times up and down making the future cash flow very dependent on the market.