CALCULATION OF FUTURE SHARE PRICE

7th Jun '23 by WarrantStar

3 comments 301 reads

I have been using a formula to estimate the price of a share in one year from now. The formula that I have used is based on the the following:

Future Share Price = Future Price earnings ratio X Future Earnings per share

However, this does not take into account the net debt or net cash position of the company.

Following Paul Scott's comments on Oxford Metrics (LON:OMG) big cash pile yesterday, I started to think that I should make an allowance for this in my calculations.

So I came up with a new formula which is

Future Share Price = (Future Price earnings ratio X Future Earnings per share) - net debt per share. In the case of net cash, the end of the formula becomes +net cash per share.

In the case of companies with large debts or large cash balances, this can have a large effect on the result of the calculation. I have asked Chat GPT if my new formula is correct, and it said that it was correct.

What do other subscribers think? Is the revision to the formula an improvement? Is it correct / valid / useful?

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Rusty2

7th Jun '23

But does the share price not reflect debt? I have looked good value shares in the past but many had large debts. Stockopedia debt also includes leases which is debatable whether these should be included.

But some stocks with large cash piles are looking good value now. How does Avingtrans (LON:AVG) look with your formula?

Should you not also be looking at asset value as well? Hargreaves Services (LON:HSP) looks very cheap.

WarrantStar

Rusty2. Thank you for reply Yes I think that, in practice, the share price does take into account the level of debt. So I take it that would mean that my above revision to the formula would be an improvement because then the formula is taking the debt into account.

I take on board your comment that Stocko's debt figure should be adjusted to take out lease payments, because they are not really debts.

It takes me quite a while to come up with the numbers for the PE ratio & the EPS. I haven't done this for Avingtrans. But what I have done is calculated that their £14.5m net cash is equivalent to 45p per share. So the revision to my formula would increase the expected result by 45p.

I believe that primary driver of most share prices is the EPS. (This may not apply to the financial sector, which I do not invest in.) Looking at the asset value may well be a good idea, but I don't think it fits well into the above valuation technique.

I have subsequently asked Chat GPT whether the proposed formula change above would be an improvement on the original. This is its reply:

"Yes, including the subtraction of net debt per share in the calculation can provide a more accurate representation of the company's value. Net debt per share represents the company's debt obligations subtracted from its cash and cash equivalents, divided by the number of outstanding shares. By subtracting net debt per share from the future share price calculation, you are accounting for the impact of the company's debt on its overall valuation.

Including net debt per share in the calculation acknowledges that a company's debt can have a significant influence on its financial health and potential future performance. Higher levels of debt can increase financial risk and affect the company's ability to generate future earnings. By subtracting net debt per share, you are effectively reducing the company's enterprise value by the amount of debt it carries, which provides a more accurate representation of the equity value available to shareholders.

However, it's worth noting that the calculation you provided is still a simplified approach and may not capture all the complexities involved in valuing a company. As mentioned earlier, factors such as market sentiment, earnings growth prospects, industry dynamics, and other financial metrics should also be considered when determining a company's value and future share price."

CALCULATION OF FUTURE SHARE PRICE

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WarrantStar

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