can anybody tell how to determine FCF Growth rate and discount rate while evaluating any stock 's intrinsic value?
FCF growth rate is depends on the following
- past growth rate say for past 10 years
- Future growth potential for the business
- Stage in which the industry/company operates - “Cash cow” stage does not require much of capital investment to sustain growth. On other hand “Automotive or consumer electronics” industries need to constantly invest and upgrade technology
Discount rate is risk free rate and risk premium. Say if Bank FD is considered risk free then 6% + whatever the premium you want to add to lock the funds in the investment. Risk free rate is subjected to change. Future FD rate may be 10%
ONE MORE IMPORTANT THING IN INDIAN CONTEXT:
You need to account for leakage in FCF. That is how much the “promoters” are going to siphon off with the help of innovative accountants.
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Can you explain the leakage with some examples ? How an investor can detect the innovative accounting tactics.
One example: Give loan —->make it bad debt—->write off
The scam has been pulled off mainly by sanctioning and disbursing astronomical amounts in secured and unsecured loans to dubious shell/pass-through companies related to DHFL’s own primary stakeholders Kapil Wadhawan, Aruna Wadhawan and Dheeraj Wadhawan through their proxies and associates, which have in turn passed the money on to companies controlled by the Wadhawans
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Got it, Peter Lynch calls it as “Insider Attack” - trustee of companies themselves corrode it.
I will categorize this factor as management integrity. Very difficult to assess but most important aspect.
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