Stock Valuation Methodology: Understanding a Company’s True Value Through 13 Models

1. Select an appropriate valuation method based on the company’s type. 2. Cross-validate using multiple methods. 3. Derive a valuation range—not a single figure. 4. Compare with the current market price to assess the margin of safety. II. Overview of Valuation Method Categories I classify the 13 methods into five broad categories according to their applicable scenarios: III. Detailed Methodologies 3.1 Defensive Valuation (Graham School) Suitable for: Conservative investors, blue-chip stocks, defensive portfolio holdings ① Graham Number Formula: Rationale: Introduced by Benjamin Graham in *The Intelligent Investor*, this formula integrates earnings power (EPS) and asset-based safety margin (BVPS); the factor 22.5 derives from an upper limit of 15× P/E multiplied by 1.5× P/B. Applicable scenarios: ・Steadily profitable blue-chip companies ・Cyclical industries at troughs ・A safe entry price for defensive investors Example: ② Graham Formula Formula: ・8.5: The justified P/E ratio for a zero-growth company ・g: Expected growth rate (%) ・4.4: The AAA corporate bond yield in 1962 ・Y: Current AAA corporate bond yield Rationale: A growth-adjusted valuation formula—each 1% increase in expected growth raises the justified P/E by two times. Applicable scenarios: ・Companies with a proven record of stable growth ・Non-high-tech growth stocks ・Industry leaders in traditional sectors Example: ③ NCAV (Net-Net Working Capital) Formula: Safe purchase price: NCAV × 2⁄3 Rationale: Graham’s 'cigar-butt' strategy—assumes liquidation, where current assets are converted to cash to repay all liabilities, leaving the remainder for shareholders. Applicable scenarios: ・Distressed companies trading below book value ・Asset-heavy traditional industries ・Special-situation investments Example: 3.2 Cash Flow–Based Valuation Suitable for: Companies with stable free cash flow; growth stocks

How do you use cash flow to assess a company’s value?

There are countless online videos explaining the DCF (Discounted Cash Flow) valuation method, and various sources present slightly different formulas—but fundamentally, DCF estimates a company’s value by discounting the sum of its future cash flows back to present value. For example, suppose a company generates ¥1 billion annually in cash flow, is assumed to exist perpetually, has a perpetual growth rate of 3% (roughly matching inflation), and uses a discount rate of 10%. A simplified calculation yields: ¥1 billion ÷ (10% − 3%) = ¥14.286 billion—i.e., a total enterprise value of approximately ¥14.286 billion. If the company has 1 billion shares outstanding, its implied share price would be ¥14.29 per share. If the stock is currently trading at ¥20 per share, then—according to this DCF estimate—it is undervalued. Note: This is only a simplified version! More sophisticated DCF models include two-stage and three-stage variants, which are considerably more complex. For deeper understanding, we recommend reading several authoritative articles on the subject. However, DCF has notable drawbacks: both the discount rate and growth rate involve significant subjectivity—there are no universally accepted standards—and small changes in either assumption can dramatically affect the final valuation.

Methanex Stock Appears Undervalued Relative to Cash Flow Outlook

1 day ago

Methanex Corporation's stock is deemed undervalued based on discounted cash flow analysis, driven by plant idlings and share repurchases despite strong production.

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