My definition of intrinsic value boils down to “a wonderful company fairly valued”. In previous posts I defined 14 value elements describing what I mean by that phrase. Now I’m looking for a better, simpler way to present the elements & the way I use them.
The 14 Elements Value Elements Are:
(1) Strong Cash Flow
(2) Strong Earnings Growth
(3) Dividend Consistency
(4) Consistent Dividend Increases
(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share
(7) Good returns on equity
(8) Little or No Debt
(9) Business Model I Understand
(10) A Durable Competitive Advantage
(11) Measure Risk
(12) Reliable Long term Dividend Income Stream
(13) Increasing Annual Dividends Faster Than Inflation
(14) Expect at least a 9% Total Return Compounded Annually
I use a three level hierarchy to test each stock. In previous posts I explained the 1st Level and 2nd Level analysis. Now I’ll take up the final and 3rd Level.
The 3rd Level analysis requires eight additional data elements. Five elements I pick up from The Motley Fool website. I enter the ticker symbol of interest in the search box that appears in the upper right corner of the site and press the “Search” button to the right of the box.
When the company data page appears I select the “Stats” tab located in the middle of the row of tabs just below the company name and description; And, I start collecting data.
Inverse Current Ratio:
With the “Stats” tab displayed I navigate to the “Financial Strength” group on the left side of the page and find the “Current Ratio”. I enter the current ratio in the designated cell of the 3rd Level Data Tab, but I enter it as its inverse; using the formula “=1/(Current Ratio)”.
Debt to Equity:
Two lines below the Current Ratio the “Total Debt/Equity” ratio is found. I copy this value into the “Debt to Equity” cell of my workbook.
Cash Flow per Share:
At the bottom of the left side of the page in the “Per Share Data” group, the value for “Cash Flow” is found. This value is entered in the workbook’s “Cash Flow per Share” cell.
Return on Equity:
On the right side of the page in the “Management Effectiveness” group I find the “Return on Equity” value and copy it into the “Return on Equity” cell of the workbook.
Return on Assets:
Just below the “Return on Equity” data the “Return on Assets” value appears. This value is entered in the “Return on Assets” cell in the 3rd Level Data Tab.
I get the “% of Shares Held by All Insiders and 5% Owners” value from the YAHOO! Finance web site under the subtitle “BREAKDOWN” in the upper left quadrant of the page. I enter this value as a decimal fraction in the “Insider Owners” cell in the workbook.
“Competitive Advantage” is a subjective value from “0” to “5” that I assign based on my understanding of the company’s business and markets.
“Business Model” is a subjective value from “-5 to “+5” that I assign based on how well I think I understand the how the company makes money.
These are the data I need for the 3rd Level analysis. In the next post I’ll review the calculations and decision criteria leading to the final “Buy” or “Reject” decision.
Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?