Beta is a measure of a stock's volatility, compared to the market as a whole. In this calculation we've used 6.5%, which is based on a levered beta of 0.951. Given that we are looking at Lightspeed POS 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 CA$68.6, the company appears reasonably expensive at the time of writing. To get the intrinsic value per share, we divide this by the total number of shares outstanding. The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$5.4b. We discount the terminal cash flows to today's value at a cost of equity of 6.5%. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.5%. We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. We do this to reflect that growth tends to slow more in the early years than it does in later years.Ī DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 10-year free cash flow (FCF) estimate We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. To begin with, we have to get estimates of the next ten years of cash flows. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.Ĭheck out our latest analysis for Lightspeed POS Step by step through the calculation Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. It may sound complicated, but actually it is quite simple! We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. ( TSE:LSPD) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value.
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