Quick Formula to Unlock the True Value of Your Stock

Finding the Exact Value of Your Stock Using Owner’s Earnings

Valuing your stock pick accurately is crucial for making informed investment decisions. One effective method is using Owner’s Earnings, a concept introduced by Warren Buffett in his 1986 Berkshire Hathaway letter. This method helps determine how much free cash flow a business generates, which can be used to grow the business. Here’s a step-by-step guide to calculating Owner’s Earnings and valuing your stock.

What Are Owner’s Earnings?
Owner’s Earnings represent the amount of “extra cash” or positive cash flow a business earns after all expenses. It’s calculated using the following formula:

Owner’s Earnings = Reported Earnings (net income) + Depreciation + Noncash Charges (receivables/payables or employee stock compensation) – Maintenance Capex

Step-by-Step Calculation
Example: Facebook (FB) Data from 12/31/2017
Find the Market Cap

Go to MarketWatch and enter the ticker symbol: FB.

Note the following:

Market Cap: $550.27B

Shares Outstanding: 2.965B

To verify, divide the Market Cap by Shares Outstanding:

$550.27B / 2.965B ≈ $185.59 (price per share)

Gather Financial Data

Click on the Financials tab and go to the Cash Flow Statement. Note the following:

Net Income: $15.93B

Depreciation, Depletion & Amortization: $3.03B

Deferred Income Tax: -$377M

Accounts Payable: $138M

Accounts Receivable: -$1.61B

Capital Expenditure: -$6.73B

Add these numbers to calculate Owner’s Earnings:

$15.93B + $3.03B – $0.377B + $0.138B – $6.73B = $11.99B

Estimate Potential Returns

Look at the historical returns of the company. For Facebook, the average annual return over the last 5 years was 33.92%.

Calculate the stock value based on different expected returns:

At 10% return: $11.99B x 10 = $119.9B / 2.965B = $40.44 per share

At 33.92% return: $11.99B x 33.92 = $406.70B / 2.965B = $137.17 per share

As of 12/31/2017, Facebook’s stock price was $186.15. According to our valuation, Facebook was overvalued at that time.

Conclusion
Valuing your stock using Owner’s Earnings provides a clear picture of its worth. While this method is effective for value investing, it may not always apply to growth stocks like Facebook. Always consider the potential and future prospects of the company. Remember, valuations change as new financial data becomes available.

For more detailed explanations, videos, and Excel spreadsheets, check out the Investing Prodigy Course.