Stock has traditionally been valued using the valuation method called DCF — or discounted cash flow. This valuation method assigns a projected value of a company's stock based in part on subjective assumptions such as projected sales and anticipated labor costs. An alternative approach is the RBP method, or required business performance. This method asks whether a company's management can deliver the necessary performance to support the company's stock price. You can value your stocks using the RBP method by working backward from the DCF method.
1. Contact the investor relations department of the company whose stock you wish to value. Locate the company's financial statements. Determine the current price of the company's stock. You will reverse engineer the financial statements to determine the type of performance required to support the price of the company's stock.
2. Calculate the company's actual revenue, based on figures published in the financial statements in its annual report. Calculate the company's free cash flow based on operating margins, available working capital and known expenditures. Calculate the discounted cash flow by applying a weighted cost of capital. Add or subtract non-cash operating items such as free cash or debt to determine the company's discounted cash flow.
3. Compare the current stock price to the discounted cash flow. You may use those figures to determine the amount of revenue the company must generate to support that current stock price. This may be translated into how many units the company must sell or how many service calls it must make to achieve those revenues. An additional important factor the determination of whether — based on past performance — the company's current management has the capability of achieving those levels of performance.
- All forms of stock analysis involve some level of subjective forecasting of future assumptions, which may be wrong. Past performance does not guarantee future results. Investors may lose money when investing in stock.