This tool offers a robust and comprehensive approach to stock valuation, utilizing both Earnings Per Share (EPS) and Free Cash Flow (FCF) methodologies to calculate the intrinsic value of a stock. By incorporating advanced financial models and simulations, it provides a detailed analysis of a company's potential value.
The app is built with React, TypeScript and Tailwind CSS. Code quality and consistency are ensured through the use of ESLint and Prettier.
Live example: https://stock-valuation.netlify.app/
- Monte Carlo Simulations: Incorporates Monte Carlo simulations to estimate the intrinsic value of a stock by accounting for uncertainty and variability in key financial parameters.
- Growth Rate Modeling: Simulates growth rate decay over time, transitioning gracefully from high initial growth to a sustainable terminal growth rate.
- Discounted Cash Flow Analysis: Computes the intrinsic value of a stock by discounting projected earnings or free cash flows to their present value.
- Validation Layer: Ensures input parameters are realistic and consistent with economic principles.
- Configurable Parameters: Allows users to adjust settings like projection years, margin of safety, and growth thresholds.
- Detailed Growth Analysis: Provides year-by-year projections of EPS, FCF, growth rates, and present values.
- Payback Time Calculator: Computes the payback time to generate an amount of cash flow sufficient to recover the initial investment.
EPS is a key metric in valuing a company's profitability. It represents the portion of a company's profit allocated to each outstanding share of common stock. This tool uses EPS as the baseline for projecting future earnings.
FCF is a measure of a company's financial performance, calculated as operating cash flow minus capital expenditures. It represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. This tool uses FCF as an alternative baseline for intrinsic value calculation.
Most DCF calculators use deterministic equations for valuation. This leads the model to inherent bias based on the inputs.
This tool, instead, uses Monte Carlo simulations - they are a powerful statistical alternative used to model the probability of different outcomes.
Monte Carlo simulations are employed to estimate the intrinsic value of a stock by running thousands of simulations with varying growth rates, terminal growth rates, and discount rates. By incorporating randomness and variability into these key financial parameters, the tool provides a more robust valuation as compared to the traditional deterministic calculators.
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Random Input Generation: For each simulation, random values for growth rate, terminal growth rate, and discount rate are generated based on their respective statistical distributions:
- Growth Rate: Modeled using a log-normal distribution to account for positive skewness, reflecting the reality that while most companies will have moderate growth rates, a few might experience exceptionally high growth rates.
- Terminal Growth Rate: Modeled using a normal distribution to reflect symmetric variability around the mean.
- Discount Rate: Modeled using a normal distribution to reflect symmetric variability around the mean.
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Simulation Execution: The tool runs a specified number of simulations (default: 10,000). For each simulation, it calculates the intrinsic value using either the Free Cash Flow (FCF) or Earnings Per Share (EPS) method, depending on the selected approach.
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Result Analysis: After running all simulations, the results are analyzed to provide key statistical metrics such as mean, median, and percentiles, offering a range of likely intrinsic values. By default, we use the median as representative of the intrinsic value.
For more detailed information on the Monte Carlo simulations used in this tool, please refer to the Monte Carlo Intrinsic Value Calculator Explanation.
The Free Cash Flow for Free metric measures how quickly the net present value of a company's projected free cash flows can potentially cover the difference between its market cap and net current assets.
This metric provides insight into the time it takes for an investment to generate enough free cash flow to cover the premium paid over the company's net current assets, indicating the safety and comparative value of the investment.
See detailed documentation FreeCashFlowForFreeExplanation.md
High-growth companies typically experience a decline in growth over time due to market saturation, competitive pressures, and scalability limits. This tool models this decay using exponential functions to transition from an initial growth rate to a terminal growth rate.
See detailed documentation GrowthRateDecayExplanation.md
The discount rate reflects the required rate of return for an investor, accounting for risk and the time value of money. It is used to calculate the present value of future cash flows.
This rate represents the sustainable long-term growth a company can achieve. It is usually aligned with GDP growth or inflation, ensuring the valuation remains grounded in economic reality.
A margin of safety reduces the intrinsic value estimate to account for uncertainties in assumptions, ensuring a conservative investment decision. This concept, popularized by Benjamin Graham, is a fundamental principle in value investing.
The margin of safety is the difference between the intrinsic value of a stock and its market price. By purchasing securities at a significant discount to their intrinsic value, investors create a buffer that protects them against errors in analysis, market volatility, and unforeseen events. This conservative approach helps to minimize potential losses and increase the likelihood of achieving satisfactory returns.
In this tool, the margin of safety is measured using the 1st percentile of the Monte Carlo simulation results. This approach provides a more conservative estimate by considering the lower end of the distribution of intrinsic values, ensuring that investment decisions are made with a higher degree of confidence and reduced risk.
Payback time is a concept popularized by Charlie Munger and Phil Town, which measures the period it takes for an investment to generate enough cash flow or profits to recover the initial investment amount. It is a straightforward method to assess the risk and return of an investment.
The payback time is calculated by determining how many years it will take for the cumulative earnings or free cash flow of a company to equal the initial investment. This method helps investors understand how quickly they can expect to get their money back, which is crucial for evaluating the attractiveness of an investment.
In this tool, the payback time calculator computes the number of years required for the projected cash flows to cover the initial investment, providing a clear and intuitive measure of investment recovery time.
The Half Life metric measures the time it takes for an investment to become twice as cheap based on its growth trajectory. This metric provides insight into the growth potential of an investment relative to its current price. Companies with a shorter half life are considered to have higher growth potential.
See detailed documentation HalfLifeExplanation.md
This project provides two API endpoints for calculating the intrinsic value of a stock using either Earnings Per Share (EPS) or Free Cash Flow (FCF).
These API's can be integrated into 3rd party app, or used in Google Sheets to directly calculate the intrinsic value through available data.
- Endpoint:
/calculateUsingEPS - Method:
GET - Description: Returns the intrinsic value and margin of safety price based on Earnings Per Share (EPS).
- Query Parameters:
sharePrice(required): The current share price of the stock.eps(required): The earnings per share of the stock.growthRate(required): The expected growth rate of the stock.terminalGrowthRate(required): The terminal growth rate of the stock.discountRate(required): The discount rate to be used in the calculation.marginOfSafety(required): The margin of safety to be used in the calculation.
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Endpoint:
/calculateUsingFCF -
Method:
GET -
Description: Returns the intrinsic value and margin of safety price based on Free Cash Flow (FCF).
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Query Parameters:
sharePrice(required): The current share price of the stock.fcf(required): The free cash flow of the stock.growthRate(required): The expected growth rate of the stock.terminalGrowthRate(required): The terminal growth rate of the stock.discountRate(required): The discount rate to be used in the calculation.marginOfSafety(required): The margin of safety to be used in the calculation.outstandingShares(required): The number of outstanding shares of the stock.
- React: Frontend framework for building user interfaces.
- TypeScript: Strongly typed language to enhance code reliability.
- Vite: Lightning-fast build tool for modern web development.
- Tailwind CSS: Utility-first CSS framework for styling.
- ESLint & Prettier: For code quality and consistent formatting.
git clone git@github.com:jawadshuaib/stock-valuation.git YOUR_PROJECT_NAME
cd YOUR_PROJECT_NAMEgit remote remove originnpm installnpm run devThis project includes unit tests for key components using React Testing Library and Jest. The tests ensure that the components behave correctly when valid and invalid inputs are provided.
npm testThe project is set up with GitHub Actions for continuous integration. The tests are automatically run on every push and pull request to the main branch. If the tests pass, the project is built and deployed to Netlify.
Test Files
Free Cash Flow Calculator: Located in FCFCalculator.test.tsx
Earnings per Share Calculator: Located in EPSCalculator.test.tsx
The StockInputValidator class ensures all input parameters are consistent with economic and financial principles. For example:
- Terminal growth rates must be lower than the discount rate.
- EPS must be positive to ensure meaningful valuation.
The GrowthCalculator class models how a company's growth transitions from an initial rate to a terminal rate over time. It accounts for faster decay in high-growth companies compared to stable ones.
The PresentValueCalculator class computes the present value of future earnings or free cash flows using the discount rate, enabling precise valuation.
The IntrinsicValueCalculator class combines:
- Year-by-year projections of EPS, FCF, and growth.
- The terminal value of the company after the projection period.
- A margin of safety to account for uncertainties.
The ValuationConfig class defines:
- Default settings such as the projection period and margin of safety.
- Limits on growth rates and discount rates to ensure realistic projections.
- Growth categories (e.g., High Growth, Moderate Growth) to classify companies.
- Input your stock's EPS, FCF, growth rate, terminal growth rate, and discount rate.
- The tool:
- Validates the inputs.
- Projects EPS or FCF growth for the next 10 years.
- Calculates the terminal value and discounts all cash flows to their present value.
- Provides an intrinsic value and a margin of safety price.
- Analyze the results, including detailed growth profiles and year-by-year projections.
Contributions are welcome! Please fork the repository, create a feature branch, and submit a pull request.
This project is licensed under the MIT License.