Growth Price (DCF Valuation)

The Growth Price is the worth of a company if it continues to grow (or shrink) at its current rate.

On a more technical level, the Growth Price is known as a Discount Cash Flow (DCF) valuation. A DCF calculates the present value of the free cash flow a company will generate in the future.

Specifically, to do a DCF, a company's future free cash flows are projected forward by applying a growth rate to the most recent year of free cash flow. This growth rate is determined by looking at the past 10 years of growth. Once future free cash flows are calculated, we then need to calculate the value of that money in the present, as $1 today is worth more than $1 tomorrow. We do this by applying a discount rate.

Here is a step-by-step explanation of how Vuru calculates the Growth Price:

  1. Take the past 10 years of FCF numbers. Over this time span calculate the growth rate between multiple different time spans. Eg. 2001-2004, 2002-2005.
  2. The median of these growth rates is used as the base growth rate. Use the base growth rate to project FCF for the next 10 years, while gradually lessening the growth rate over time to conservatively account for slower growth.
  3. Project a further 10 years of FCF using a 3% terminal growth rate.
  4. Calculate the net present value of this future FCF using a discount rate of 15% (by default).
  5. Take the result and add in the current Stockholders' Equity. This number is the company's intrinsic value.
  6. Divide the intrinsic value by the number of outstanding shares to get the Vuru Growth Price.

Note that the input values that can be adjusted on the Valuation tab of a stock report are the growth rate and discount rate.

Why is the Growth Price negative in some cases?

When the most recent year of free cash flow (FCF) is out of line with previous growth, we smooth it out by averaging the numbers over the past few years to avoid overly high or low numbers skewing the valuation.

If the average FCF over the past few years is negative and stockholders' equity isn't large enough to compensate, this causes the Growth Price to be negative.

This can be a signal that the company has faced tough times or extremely high costs in recent years. It's important to look into the cause and determine whether it's a major concern.