Zachary-An investor with common sense

     After calculating the free cash flow of operating assets, what academic finance teaches you is to subtract the operating assets by total debt add cash on balance, and then use the result divided by total shares outstanding to get the stock price. However, if you check “ Stock compensations in SG&A ” in  my previous post , you can find that the stock compensations are claims on part of future cash flow and that analysts' and accountants’ actions cannot reflect the actual cost of stock compensation. Since calculating the market value of debt and cash is easier for me, I decided to calculate the value of Oracle stock compensation first. Employee stock options When estimating employee stock options, we need to calculate the present value of: How much stock options did the company pay before How much stock options does the company have now How much stock options we estimate the company will issue in the future. Previous stock options: The good t...

  Earnings and Free cash flow      To estimate the future earnings, we will need to know the future revenues and profit margins.      To estimate future revenues, we need to know the future reinvestment rate and return on invested capital.      Recall that the reinvestment rates are as follows: So I first calculate: Oracle’s Capital expenditure (from financial statements)/sales ratio Depreciation/Capex ratio NOWC/Sales ratio R&D/Sales ratio to estimate future investment. (I will explain how to deal with acquisition later).      In essence, all items above should be Capital expenditure. But the “capital expenditure” we include here refers to the traditional accounting definition of capex, and you can find the explanation in my previous post by searching “Traditional accounting”. However, I got new challenges. Figure 1      As you can see, Oracle has few capital expenditures o...

  Beta Calculation While you can check the beta calculation in my previous post , I do want to point out some changes in the process here, and an IMPORTANT common sense check you should conduct.              In the past, I used accountants' reported Debt/Equity ratios for companies in my sample to save time. Otherwise, I need to calculate the market value of debt for  20- 30 companies for one company valuation. However, I decided to value the market value of debt and operating leases for each company in my sample, just like in the post above. There are two reasons I do it: The past decade has been when people get used to the low interest rate and bond yield. The US 10-year government bond yield has been between 0-2% during this period. However, governments worldwide flushed generous stimulus checks, and benefits have kept the inflation high, making the global bond yield jump since a higher rate of return is ne...