Investment software for private investors

Valuation using Capitalization of Cash Flow

This method values a company as it stands today. It assumes the business will continue to generate at least the minimum expected cash flow for the projected period. It takes the company’s free cash flow and capitalizes it at an appropriate rate of return to get the value of the business. The business is valued is an investment opportunity.

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Valuing "WPP WPP PLC"

Valuation Assumptions

Latest quoted share price £  
Number of ordinary shares  
Required annual rate of return   %  
Latest reporting financial year    
Total cash & cash equivalents £
Total interest-bearing debts £
Net operating cash flow £
Capital expenditure £

Valuation Results

  • Price & Intrinsic Value Chart
  • £10.70
    Highest price you can pay to get 10% annual return
    Your annual return if you pay at market price £8.21
    Your annual return if you pay at intrinsic value £7.19
    Value Vs Price variation


Net operating cash flow £1,403,600,000
- Less average capital expenditure £253,066,667
Free cash flow £1,150,533,333
Value of company operations (£1,150,533,333 / 10%) £11,505,333,333
+ Add cash & cash equivalents £2,218,000,000
- Less total interest-bearing debts £5,995,000,000
Business intrinsic value £7,728,333,333
Business intrinsic value per share £7.19

+Tips & Advice

  • Cash flow is a key indicator of financial health and it demonstrates to investors, creditors and other core constituencies a company’s ability to meet obligations, finance opportunities and cash available for use as needs arise. Cash-flow that is wildly inconsistent with net income often indicates operating or managerial problems.
  • It is virtually impossible to distinguish between the essential capex necessary to sustain the business in its current state, and that which is directed towards future expansion. Moreover, valuation often assumes the structure will change, in this respect, planned growth is essential to the argument, so all forecast capex is essential. Companies with a durable competitive advantage tend to have low capital expenditures.
  • The investor’s annual rate of return from investing in the company can be determined in three ways. You can calculate the weighted average cost of capital (WACC) of the firm as the rate of return; the built-up method using inflation, risk-free rate and equity-risk premium as the components in arriving at an appropriate rate of return or simply the minimum hurdle rate you would require for investing in the business. Most venture capital firms demand a compound annual return of 25% to 30% and many leveraged buyouts have been risky enough to warrant interest rate of 20% to 25% on their secured borrowing.
  • The number of common shares should be almost constant or slowly decreasing may be due to the repurchasing of outstanding shares. This helps to increase earnings per share which in turn drives up the company’s share price. A dramatic increase in the number of shares outstanding over a number of years without an increase in the company’s earnings usually means that the business is selling new shares to increase its capital base to make up for the fact that it is a mediocre business.