Discounted Cash Flow Calculator For Share Valuation

When we buy shares we all want to buy cheap and sell dear.However the really difficult thing is figuring out whether something is actually cheap.To an extent we can try to rely on our memories and those of older people to compare current prices with historic prices adjusted for inflation.If we have preserved old papers we can do slightly better than rely on memories and impressions.This method however does not really work when the economy and the company itself has changed beyond recognition.So if our parents or grandparents bought SBI shares at IPO for 100 rupees a share we would have a long wait to see those prices ,or even those prices adjusted for inflation, again.

To buy at dips or corrections in the share price,or to buy only in bear markets is a good idea.But no one has been able to predict  market bottoms consistently.So we are all faced with the decision of whether to buy a given company’s shares at a given price or not at any given time.And it helps to know whether we getting  a good enough price if not the lowest price.To determine if we are getting a good enough price we can compare it with the fair value of the share we get by using this calculator http://www.moneychimp.com/articles/valuation/dcf.htm

The calculator takes values in US Dollars,but if we mentally replace the sign with any other currency sign we will be OK.We just need to focus on the absolute numbers.We can get The EPS numbers from the Annual Financial Reports(either buy one share and have this document delivered home every year or download it from the company website), financial websites, ads in the  financial newspapers like Economic Times etc.Finding the growth in earnings figure to plug into the calculator is a bit more tricky.I just go over the last 3 years EPS(often found in the year’s AFR or you need to find the back reports often found on company websites) and work out the average year on year growth in earnings.I then look to the management discussion section and check overall forecast for the industry.I then check for any debt funded expansion plans that are likely to affect the EPS.I then use these three pieces of information to guesstimate a growth in EPS.I keep the growth estimate for 5 years only and the annual growth rate therafter at 0%.The discount rates I use is the average 10 year Sensex returns I get from here: http://www.hdfcfund.com/Calculators/SensexRollingReturnsCalculator.aspx?ReportID=C208C983-C4A5-41B4-B245-CB77C8D2EDC3

Then I accept my falliability and try to look for shares of good companies available at prices well below those I get from using this calculator and my inputs.I then try to forget about the stock market and the daily fluctuations of share prices till the next time I wish to buy shares.