How nopat uses to determine the stock price
Net Operating Profit After Taxes (NOPAT) is a key metric used in financial analysis to determine the intrinsic value of a company’s stock. It provides a clearer view of a company’s operational profitability by excluding the impact of debt and non-operating income and expenses. Here’s how NOPAT can be used to determine the stock price:
Calculate NOPAT:
NOPAT = Operating Income × (1 – Tax Rate)Operating Income is derived from the company’s income statement.
Determine Free Cash Flow (FCF):
FCF is derived from NOPAT and considers capital expenditures (CapEx) and changes in working capital.FCF = NOPAT + Depreciation & Amortization – Change in Working Capital – CapEx
Estimate Growth Rates:
Determine the expected growth rate of FCF based on historical performance, industry trends, and company projections.
Determine the Discount Rate:
The discount rate (often the Weighted Average Cost of Capital or WACC) is used to discount future cash flows to present value.
Forecast Future Cash Flows:
Project FCF for a certain number of years into the future (typically 5-10 years).
Calculate the Terminal Value:
After the forecast period, estimate the terminal value, which represents the value of all future cash flows beyond the forecast period.Terminal Value = Final Year FCF × (1 + Long-term Growth Rate) / (Discount Rate – Long-term Growth Rate)
Discount Future Cash Flows and Terminal Value to Present Value:
Use the discount rate to bring all future cash flows and terminal value to present value.Present Value of FCFs = Sum of (FCF in each year / (1 + Discount Rate)^Year)Present Value of Terminal Value = Terminal Value / (1 + Discount Rate)^Final Year
Calculate Enterprise Value (EV):
EV = Present Value of FCFs + Present Value of Terminal Value
Determine Equity Value:
Subtract net debt (total debt – cash and cash equivalents) from the enterprise value to get the equity value.Equity Value = EV – Net Debt
Calculate Stock Price:
Divide the equity value by the number of outstanding shares to determine the stock price.Stock Price = Equity Value / Number of Outstanding Shares
Example Calculation
Let’s assume a hypothetical company with the following data:Operating Income: $100 Million Tax Rate: 30%Depreciation & Amortization: $10 million CapEx: $20 Million Change in Working Capital: $5 Million Expected FCF Growth Rate: 5%Discount Rate (WACC): 10%Long-term Growth Rate: 3%Net Debt: $50 Million Number of Outstanding Shares: 10 million
Calculate NOPAT:NOPAT = $100 million × (1 – 0.30) = $70 million
Determine Free Cash Flow (FCF):FCF = $70 million + $10 million – $5 million – $20 million = $55 million
Forecast Future Cash Flows (assuming a 5% growth rate for 5 years):Year 1 FCF = $55 million × 1.05 = $57.75 Million Year 2 FCF = $57.75 million × 1.05 = $60.64 Million Year 3 FCF = $60.64 million × 1.05 = $63.67 Million Year 4 FCF = $63.67 million × 1.05 = $66.85 Million Year 5 FCF = $66.85 million × 1.05 = $70.19 million
Calculate Terminal Value (at the end of Year 5):
Terminal Value = $70.19 million × (1 + 0.03) / (0.10 – 0.03) = $1.034 billion
Discount Future Cash Flows and Terminal Value:
Present Value of FCFs = $57.75M / 1.10 + $60.64M / (1.10^2) + $63.67M / (1.10^3) + $66.85M / (1.10^4) + $70.19M / (1.10^5) ≈ $236.6 Million Present Value of Terminal Value = $1.034 billion / (1.10^5) ≈ $642.3 million
Calculate Enterprise Value (EV):
EV = $236.6 million + $642.3 million ≈ $878.9 million
Determine Equity Value:
Equity Value = $878.9 million – $50 million = $828.9 million
Calculate Stock Price:Stock Price = $828.9 million / 10 million shares = $82.89 per share
By following these steps, you can use NOPAT to help determine the intrinsic value of a company’s stock.
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