Stock Valuation Method
In our last post “Best Stock Valuation Calculation to Value Company Shares is ROEV”, we examined the Return on Enterprise Value (ROEV) calculation. The ROEV is a stock value investing method and a valuable financial ratio for comparing the values of different companies.
Net Cash Flow (NCF) / Enterprise Value (EV) = Return on Enterprise Value %
Use Net Cash Flow (NCF) as the numerator and Enterprise Value (EV) as the denominator to determine the Return on Enterprise Value (ROEV).
Example of Calculation – Cisco Systems (CSCO) vs. Apple (AAPL)
NCF EV = ROEV
Cisco Systems (CSCO) 10.5 64 = 16.4%
Apple Computer (AAPL) 24 283 = 8.5%
The value in this ratio is that it makes comparisons at market value, (the price an investor theoretically can buy or sell at today). Cisco is earning over 16% on the market value of the business while Apple is making only 8.5%. Some might ask: how can this be true? Everyone knows Apple is growing fast and Cisco’s rate of grow has slowed significantly. But this shows the market has already taken these facts into account. Apple is priced high (lowering the rate of return on cash flow) while Cisco is out of favor at a 52 week low (raising the rate of return on cash flow).
Buy AAPL or Buy CSCO
The fast growth of Apple is already priced into the stock. A growth investor may still choose to purchase Apple stock believing that the company will continue accelerating earnings. A value investor may choose to buy Cisco believing the price is low enough to provide “a margin of safety”.
Disclosure: The Arbor Asset Allocation Model Portfolio (AAAMP) is long Cisco Systems (CSCO). No position in Apple (APPL).
Related Reading:
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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{ 4 comments… read them below or add one }
Example of Calculation – Cisco Systems (CSCO) vs. Apple (AAPL)
NCF EV = ROEV
Cisco Systems (CSCO) 10.5 64 = 16.4%
Apple Computer (AAPL) 283 24 = 8.5%
ROEV=NCF/EV
ROEV of Cisco Systems: 10.5/64=0.164 x 100 = 16.4%
ROEV of Apple Comp: 283/24 = 11.79 x100 = 1179%
The math in this article is a bit confusing; I don’t understand where AAPL’s ROEV is 8.5%; would you explain further?
Thank you.
My Bad! Sorry Loi….thank you for point out MY numbers were reversed on the post. I have corrected it. Apple net cash flow = 24 (not 283) . Apple EV = 283 (not 24). I’m sorry for the confusion.
24 divided by 283 = .0848 X 100 = 8.48%
Thank you for pointing my error out.
Great series of articles,
I’m trying to recreate your numbers, and apply this technique to other companies.
However, I can’t seem to find how you calculated 24 Billion for AAPL’s Net Cash Flow.
From what I can see, their 2011 Net Income is 14.013 Billion.
AAPL’s Non-Cash actions shown in the Cash Flow Statement is .903 Billion and Depreciation is shown as 1.027 Billion.
Based on the “Net Cash Flow= Net Income + Non-Cash Expenses” that only leaves it at 15.943 Billion for NCF.
If you could possibly do a follow up post, going in-depth for your calculations that would be very helpful in trying to understand the method.
Jeff – Your numbers are correct using the fiscal year ending Sept. 2010. My numbers are using the 4 quarters ending March 2011. Thanks for the great question. It shows you are thinking for yourself!
Ken