Frequently Asked Questions
Stability Price (EPV Valuation)
The Stability Price is the value of a company if it continues to operate at current earnings levels, with no growth.
On a more technical level, it's an Earnings Power Value (EPV) valuation. An EPV calculates the value of a company from its ongoing operations. This is done by adjusting free cash flows to ignore any capital expenditures used for growth. It assumes that current profitability is sustainable.
Here is a step-by-step explanation of how Vuru calculates the Stability Price:
- Take the past 5 years of EBIT and Revenue. For each year, divide the EBIT by Revenue, and take the average of these 5 results. This is the average normalized income.
- Multiply the average normalized income by the most recent year of revenue to get the normalized EBIT.
- Deduct taxes from the EBIT. Vuru assumes the corporate tax rate will be 38%.
- Add back 20% of Depreciation and Amortization (most recent year).
- Add back 25% of Sales, General & Administrative Expenses (most recent year).
- Add back 25% of Research & Development (most recent year, if applicable). This result is the adjusted operating cash flow.
- Take the past 5 years of Investments in PPE and revenue. For each year, divide the PPE by Revenue, and take the average of these 5 results. This is the average PPE sales.
- Calculate the difference revenue between the most recent year of revenue and the previous year. This is the change in revenue.
- Multiply the average PPE sales by the change in revenue to get the growth capex.
- Subtract the most recent year of Capital Expenditure from the growth capex to get the maintenance capex.
- Take the adjusted operating cash flow (result of Part A) and add it to the maintenance capex (result of Part B) to get the normalized earnings.
- Divide the normalized earnings by a discount rate of 15% (by default).
- Subtract short term and long term debt from this number.
- Take Cash and Cash Equivalents and subtract 1% of the most recent year of Revenue from it. If this number is positive, add it to the result from step 3. This gives the Earnings Power Value of the company.
- Divide the Earnings Power Value by the number of outstanding shares to get the Vuru Stability Price.
Why is the Stability Price negative in some cases?
If a company requires significant capital investment to maintain operations, this can cause the Stability Price to be negative because the capital expenditures are larger than the adjusted operating income.
This is a signal that the company is heavily reliant on income growth to sustain itself and has to spend significantly to deliver that growth. Further, because of the extremely capital intensive nature of the business the company has to gorge on debt to fuel that growth.