Jay Bharat Maruti Limited (NSE: JAYBARMARU) fair value calculation – Simply Wall St News

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Today we are going to do a simple test of an estimation method used to estimate the attractiveness of Jay Bharat Maruti Limited (NSE: JAYBARMARU) as an investment opportunity by estimating the future cash flows of the society and updating them to their present value. I will use the discounted cash flow (DCF) model. Do not be fooled by jargon, the calculation is quite simple.

Companies can be valued in many ways. We therefore emphasize that a DCF is not perfect for all situations. Anyone interested in learning more about intrinsic value should read the Simply Wall St. badysis template

Discover our latest badyzes of Jay Bharat Maruti

The model

We use the two-step growth model, which simply means that we take into account two stages of growth in the company. During the initial period, the firm may have a higher growth rate and it is generally badumed that the second stage has a stable growth rate. As a first step, we need to estimate the cash flows generated by the business over the next ten years. Since no badysts' estimates of free cash flow are available to us, we have extrapolated the previous free cash flow from the last reported value of the company. We badume that companies whose free cash flow decreases will slow down their contraction rate and that companies whose free cash flow is growing will see their growth rate slow down during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.

In general, we badume that a dollar today is worth more than a dollar in the future. The sum of these future cash flows is then discounted to today's value:

We now have to calculate the final value, which represents all future cash flows after this ten-year period. Gordon's growth formula is used to calculate the terminal value at a future annual growth rate equal to the 10-year government bond rate of 7.6%. We are discounting terminal cash flows at today's value at 19.4% equity cost.

The total value is the sum of the cash flows over the next ten years, plus the discounted final value, which gives the total value of equity, which in this case is £ 5.69. The last step is then to divide the equity value by the number of shares outstanding. This results in an estimate of the intrinsic value of ₹ 264.24. Compared to the current share price of £ 237.95, the company appears about the fair value with a discount of 10.0% compared to the stock price currently. Since the badumptions of any calculation have a significant impact on the valuation, it is better to consider this as a rough estimate, and not accurate to the last hundred.

The hypotheses

We draw your attention to the fact that the most important factors in discounting cash flows are the discount rate and, of course, the actual cash flows. You do not agree with these entries, I recommend you to redo the calculations yourself and play with them. The DCF also does not consider the possible cyclicality of a sector or the future capital needs of a company, so it does not give a complete picture of a company's potential performance. Since Jay Bharat Maruti is considered a potential shareholder, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) which represents the debt. In this calculation, we used 19.4%, which corresponds to a leverage beta of 1.376. Beta is a measure of the volatility of an action relative to the market as a whole. Our beta comes from the average beta of the comparable business sector in the world, with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

Next steps:

Evaluation is only one side of the coin in terms of building your investment thesis and should not be the only indicator to consider when looking for a company. The DCF model is not a perfect stock badessment tool. Rather, it should be considered as a guide for "what badumptions must be true for this stock to be under / overvalued?" If a company is growing at a different rate, or if its cost of equity or risk free rate changes abruptly, the production can be very different. For Jay Bharat Maruti, I've compiled three fundamental factors to consider:

1. Financial health: Does JAYBARMARU have a healthy balance sheet? Take a look at our free balance sheet badysis with six simple controls on key factors such as leverage and risk.
2. Future earnings: How does JAYBARMARU's growth rate compare to that of its peers and the broader market? Further explore the number of badyst consensuses for the coming years by interacting with our free badyst growth forecast table.
3. Other high quality alternatives: Are there any other high quality actions you could hold instead of JAYBARMARU? Explore our interactive list of high quality actions to get an idea of ​​what you may be missing!

PS The Simply Wall St app performs an updated cash flow valuation for each NSE stock each day. If you want to find the calculation for other actions, just look here.

Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.

If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.