Figuring percentages with cash8/15/2023 We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. Beta is a measure of a stock's volatility, compared to the market as a whole. In this calculation we've used 9.0%, which is based on a levered beta of 1.155. Given that we are looking at Shoals Technologies Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The first is the discount rate and the other is the cash flows. The calculation above is very dependent on two assumptions. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. Relative to the current share price of US$25.8, the company appears around fair value at the time of writing. In the final step we divide the equity value by the number of shares outstanding. The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$4.2b. We discount the terminal cash flows to today's value at a cost of equity of 9.0%. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:Īfter calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. We do this to reflect that growth tends to slow more in the early years than it does in later years. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. In the first stage we need to estimate the cash flows to the business over the next ten years. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. View our latest analysis for Shoals Technologies Group What's The Estimated Valuation? If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. Don't get put off by the jargon, the math behind it is actually quite straightforward.Ĭompanies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Our analysis will employ the Discounted Cash Flow (DCF) model. ( NASDAQ:SHLS) by taking the forecast future cash flows of the company and discounting them back to today's value. In this article we are going to estimate the intrinsic value of Shoals Technologies Group, Inc. Our fair value estimate is 19% lower than Shoals Technologies Group's analyst price target of US$30.81 With US$25.80 share price, Shoals Technologies Group appears to be trading close to its estimated fair value Using the 2 Stage Free Cash Flow to Equity, Shoals Technologies Group fair value estimate is US$24.87
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