The Application Of Company Valuation Method In Stock Speculation

The relative valuation method is widely used for its simplicity and ease of calculation.

But in fact, each kind of relative valuation method has its own application scope, and is not applicable to all types.

Generally speaking, the lower the P/E value, the more the company has.

On the other hand, most investors are concerned about the PE value itself and the comparison with the historical value. The logic of the PE valuation method is seriously shallow.

Logically, the PE valuation method is absolutely reasonable, the stock price is P=EPS P/E, and the stock price is determined by the product of EPS and reasonable P/E value.

Under other conditions, EPS predicts that the higher the growth rate, the higher the reasonable P/E value will be, and the stock price will rise. The high EPS growth share enjoys a high reasonable P/E low growth share enjoys a low reasonable P/E.

Therefore, when the actual growth rate of EPS is lower than expected (the multiplier is smaller), the reasonable P/E value decreases (multiplier), the double blow of multiplier effect is small, and the share price has a setback, otherwise it is the same.

When a company's actual growth rate is higher or lower than expected, when the stock price is skyrocketing or plunging, investors often shout "up or down" to make people fail to understand or "not to go up or down".

It is not surprising that the multiplier effect of PE valuation law is at work.

Redundant absolute valuation method

The absolute valuation method (discount method) has been introduced into China almost simultaneously with the relative valuation method, but it has always been in an awkward position of marginalization. The absolute valuation method has always been regarded as "perfect in theory but not practical", mainly because:

(1) the basic data of Chinese listed companies are relatively lacking, and it is difficult to obtain accurate model parameters.

After the untrusted data entered the model, the result of poor rationality was obtained, and the confidence in the absolute valuation model itself was shaken and doubted.

(2) the circulating shares of Listed Companies in China are less than 1/3 of the total share capital, which is not consistent with the basic assumptions of the full circulation in the valuation models developed in developed countries.

However, since 2004, the marginalization of the absolute valuation method has been greatly improved, mainly because: the industry structure of the Chinese stock market is mainly cyclical in industry, especially in energy and raw materials.

Since May 2004, macroeconomic regulation and control has reduced the importance of the "TOP-DOWN" research method (macro economic analysis industry prosperity judgement - leading company profit forecast) which was widely used during the period of the cyclical boom. In the background of the cyclical downturn, the traditional relative valuation method can not explain the serious divergence between the company's share price and its intrinsic value. The importance of the research method of "subdivision industry and selected stocks" has increased, and the company's absolute valuation law has begun to rise to the surface.

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Especially since 2005, the issue of split share structure in China has been resolved step by step.

After the resolution of the split share structure, the value of Chinese Listed Companies in the future full circulation will be estimated by the absolute valuation method, which further promotes the concern of investors, especially institutional investors, to the absolute valuation law.

In the absolute valuation method, the DDM model is the most basic model. At present, the most mainstream DCF method also draws heavily on some logic and calculation methods of DDM.

Theoretically, when the company's free cash flow is used exclusively for dividend payment, there is no essential difference between the DCF model and the DDM model. But in fact, dividends can not be equated with the company's free cash flow in the low dividend payout rate or in the high dividend payout rate in the United States, for four reasons:

(1) stability requirements, the company is uncertain whether it will be able to pay high dividends in the future.

(2) in the future, the company is expected to have possible capital expenditure and retain cash to eliminate the inconvenient and expensive financing in the future.

(3) tax factors, capital gains tax or personal income tax imposed by foreign countries.

(4) signal characteristics, there is a widespread market view of "dividend rises, prospects can be seen at a high level; dividends decline, indicating a weak outlook for the company".

The dividend payout ratio of Chinese listed companies is not high, the proportion and quantity of dividends are not stable, and the situation is also difficult to improve in the short term. The DDM model is basically not applicable in China.

At present, the most widely used DCF valuation method provides a rigorous analytical framework to systematically consider every factor that affects the value of a company, and finally evaluate the value of a company's investment.

The essential difference between DCF valuation and DDM is that the DCF valuation method uses free cash flow instead of dividends.

Free cash flow for the firm is proposed by rappaort, an American scholar. The basic concept is the cash that can be allocated to the company's capital suppliers (i.e. various stakeholders, including shareholders and creditors), which are generated by the company after the reinvestment needs are met and do not affect the sustainable development of the company.

Two sided coin is appropriate.

The relative valuation method and the absolute valuation method are two sides of a coin.

Different valuation methods are applicable to companies with different industries and financial conditions. For different companies, specific problems should be analyzed in detail, and different valuation methods should be carefully chosen.

The combination of multiple relative methods and at least one absolute valuation model (mainly based on DCF) will achieve better results.

For example, expressway listed companies focus on stability, choose the DCF method and select EV/EBITDA respectively. The listed companies of biomedicine and Internet software development focus on growth. The first choice is PEG method, the second is P/B and EV/EBITDA. The real estate and commercial and hotel industry listed companies pay attention to the difference between the book value and real value of assets (real estate) and so on, which may bring benefits or benefits to the company. RNAV method and PE method should be combined. The resource listed companies should pay attention to the possession of mineral resources besides paying attention to output. The option pricing (Black-Scholes) model should be adopted.