How to Calculate the Value of the Company

Company Valuation Calculator (Simplified DCF)

Use this calculator to estimate the intrinsic value of a company using a simplified Discounted Cash Flow (DCF) model. This method projects a company's future free cash flows and discounts them back to their present value.

function calculateCompanyValue() { var currentAnnualRevenue = parseFloat(document.getElementById('currentAnnualRevenue').value); var annualRevenueGrowthRate = parseFloat(document.getElementById('annualRevenueGrowthRate').value) / 100; var operatingMargin = parseFloat(document.getElementById('operatingMargin').value) / 100; var taxRate = parseFloat(document.getElementById('taxRate').value) / 100; var capexAsPctRevenue = parseFloat(document.getElementById('capexAsPctRevenue').value) / 100; var workingCapitalChangeAsPctRevenue = parseFloat(document.getElementById('workingCapitalChangeAsPctRevenue').value) / 100; var discountRate = parseFloat(document.getElementById('discountRate').value) / 100; var terminalGrowthRate = parseFloat(document.getElementById('terminalGrowthRate').value) / 100; var forecastPeriodYears = parseInt(document.getElementById('forecastPeriodYears').value); // Input validation if (isNaN(currentAnnualRevenue) || isNaN(annualRevenueGrowthRate) || isNaN(operatingMargin) || isNaN(taxRate) || isNaN(capexAsPctRevenue) || isNaN(workingCapitalChangeAsPctRevenue) || isNaN(discountRate) || isNaN(terminalGrowthRate) || isNaN(forecastPeriodYears) || currentAnnualRevenue < 0 || annualRevenueGrowthRate < 0 || operatingMargin < 0 || taxRate < 0 || capexAsPctRevenue < 0 || workingCapitalChangeAsPctRevenue < 0 || discountRate <= 0 || terminalGrowthRate < 0 || forecastPeriodYears < 1) { document.getElementById('companyValuationResult').innerHTML = 'Please enter valid positive numbers for all fields. Discount Rate must be greater than 0.'; return; } if (discountRate <= terminalGrowthRate) { document.getElementById('companyValuationResult').innerHTML = 'Discount Rate must be greater than Terminal Growth Rate for the Terminal Value calculation to be valid.'; return; } var totalPresentValueFCF = 0; var projectedRevenue = currentAnnualRevenue; var lastFCF = 0; var detailedResults = '

Projected Free Cash Flows:

'; for (var i = 1; i <= forecastPeriodYears; i++) { projectedRevenue *= (1 + annualRevenueGrowthRate); var ebit = projectedRevenue * operatingMargin; var nopat = ebit * (1 – taxRate); var capex = projectedRevenue * capexAsPctRevenue; var workingCapitalChange = projectedRevenue * workingCapitalChangeAsPctRevenue; var fcf = nopat – capex – workingCapitalChange; var discountedFCF = fcf / Math.pow(1 + discountRate, i); totalPresentValueFCF += discountedFCF; lastFCF = fcf; detailedResults += ''; } detailedResults += '

Year	Revenue ($)	NOPAT ($)	FCF ($)	Discounted FCF ($)
' + i + '	$' + projectedRevenue.toFixed(2) + '	$' + nopat.toFixed(2) + '	$' + fcf.toFixed(2) + '	$' + discountedFCF.toFixed(2) + '

'; // Calculate Terminal Value var terminalValue = (lastFCF * (1 + terminalGrowthRate)) / (discountRate – terminalGrowthRate); var discountedTerminalValue = terminalValue / Math.pow(1 + discountRate, forecastPeriodYears); var companyValue = totalPresentValueFCF + discountedTerminalValue; detailedResults += '

Summary:

'; detailedResults += 'Sum of Discounted Free Cash Flows (Forecast Period): $' + totalPresentValueFCF.toFixed(2) + ''; detailedResults += 'Terminal Value (at end of forecast period): $' + terminalValue.toFixed(2) + ''; detailedResults += 'Discounted Terminal Value: $' + discountedTerminalValue.toFixed(2) + ''; detailedResults += 'Estimated Company Value: $' + companyValue.toFixed(2) + ''; document.getElementById('companyValuationResult').innerHTML = detailedResults; } .company-valuation-calculator { font-family: Arial, sans-serif; max-width: 700px; margin: 20px auto; padding: 20px; border: 1px solid #ccc; border-radius: 8px; background-color: #f9f9f9; } .company-valuation-calculator h2, .company-valuation-calculator h3 { color: #333; text-align: center; } .calculator-inputs label { display: inline-block; width: 250px; margin-bottom: 8px; font-weight: bold; } .calculator-inputs input[type="number"] { width: 150px; padding: 8px; margin-bottom: 8px; border: 1px solid #ddd; border-radius: 4px; } .calculator-inputs button { display: block; width: 100%; padding: 10px; background-color: #007bff; color: white; border: none; border-radius: 4px; font-size: 16px; cursor: pointer; margin-top: 20px; } .calculator-inputs button:hover { background-color: #0056b3; } .calculator-result { margin-top: 20px; padding-top: 15px; border-top: 1px solid #eee; } .calculator-result p { font-size: 1.1em; margin-bottom: 5px; } .calculator-result table { width: 100%; border-collapse: collapse; margin-top: 15px; } .calculator-result table, .calculator-result th, .calculator-result td { border: 1px solid #ddd; } .calculator-result th, .calculator-result td { padding: 8px; text-align: right; } .calculator-result th { background-color: #f2f2f2; font-weight: bold; } .calculator-result tbody tr:nth-child(even) { background-color: #f9f9f9; } .calculator-result tbody tr:hover { background-color: #f1f1f1; }

Understanding Company Valuation with DCF

Company valuation is the process of determining the economic value of a business. It's a critical step for investors, business owners, and analysts to make informed decisions about buying, selling, or investing in a company. There are various methods, but the Discounted Cash Flow (DCF) method is widely regarded as one of the most robust because it focuses on the intrinsic value derived from a company's ability to generate future cash flows.

What is the Discounted Cash Flow (DCF) Method?

The DCF method estimates the value of an investment based on its expected future cash flows. It calculates the present value of these future cash flows, taking into account the time value of money – the idea that money available today is worth more than the same amount in the future due to its potential earning capacity.

Key Components of the DCF Model:

1. Free Cash Flow (FCF) Projections: This is the cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets. It's the cash available to all capital providers (debt and equity holders). The calculator projects FCF based on:
   • Current Annual Revenue: The starting point for your projections.
   • Annual Revenue Growth Rate: The expected percentage increase in revenue each year.
   • Operating Margin: The percentage of revenue that turns into operating profit (EBIT – Earnings Before Interest and Taxes).
   • Tax Rate: The corporate tax rate applied to operating profit to get Net Operating Profit After Tax (NOPAT).
   • Capital Expenditure (Capex) as % of Revenue: The percentage of revenue reinvested into fixed assets (e.g., property, plant, equipment) to maintain or grow the business.
   • Working Capital Change as % of Revenue: The change in current assets minus current liabilities, representing the cash tied up or released from short-term operations.
2. Discount Rate (WACC): The rate used to discount future cash flows back to their present value. This typically represents the company's Weighted Average Cost of Capital (WACC), which is the average rate of return a company expects to pay to finance its assets. It reflects the riskiness of the company's future cash flows. A higher discount rate implies higher risk and results in a lower present value.
3. Forecast Period: The explicit period (e.g., 5-10 years) for which you project detailed free cash flows. Beyond this period, it becomes difficult to forecast with accuracy.
4. Terminal Value: Represents the value of the company's cash flows beyond the explicit forecast period. It assumes the company will continue to generate cash flows indefinitely, growing at a stable, perpetual rate (Terminal Growth Rate). The terminal value is then discounted back to the present day.

How the Calculator Works (Simplified DCF Steps):

1. Project Revenue: Starting with current revenue, the calculator projects future revenue based on the annual growth rate for each year of the forecast period.
2. Calculate NOPAT: Operating Profit (EBIT) is derived from projected revenue and the operating margin. This is then adjusted for taxes to get Net Operating Profit After Tax (NOPAT).
3. Calculate Free Cash Flow (FCF): From NOPAT, the calculator subtracts capital expenditures and changes in working capital to arrive at the FCF for each year.
4. Discount FCFs: Each year's FCF is discounted back to its present value using the specified discount rate.
5. Calculate Terminal Value: At the end of the forecast period, a terminal value is calculated using the last projected FCF, the terminal growth rate, and the discount rate. This represents the value of all cash flows beyond the explicit forecast.
6. Discount Terminal Value: The terminal value is also discounted back to the present day.
7. Summation: The sum of all discounted FCFs from the forecast period and the discounted terminal value gives the estimated total company value.

Example Calculation:

Let's use the default values in the calculator:

• Current Annual Revenue: $5,000,000
• Annual Revenue Growth Rate: 10%
• Operating Margin: 15%
• Tax Rate: 25%
• Capital Expenditure as % of Revenue: 3%
• Working Capital Change as % of Revenue: 1%
• Discount Rate (WACC): 12%
• Terminal Growth Rate: 3%
• Forecast Period: 5 Years

Year 1:

• Projected Revenue: $5,000,000 * (1 + 0.10) = $5,500,000
• EBIT: $5,500,000 * 0.15 = $825,000
• NOPAT: $825,000 * (1 – 0.25) = $618,750
• Capex: $5,500,000 * 0.03 = $165,000
• Working Capital Change: $5,500,000 * 0.01 = $55,000
• FCF: $618,750 – $165,000 – $55,000 = $398,750
• Discounted FCF: $398,750 / (1 + 0.12)^1 = $356,026.79

This process continues for 5 years. The sum of these discounted FCFs, plus the discounted terminal value (calculated from the FCF of Year 5), will give the total estimated company value.

Using these inputs, the calculator would yield an estimated company value of approximately $6,000,000 – $7,000,000 (the exact figure will be displayed by the calculator).

Important Considerations:

• Assumptions: DCF is highly sensitive to the inputs. Small changes in growth rates, margins, or the discount rate can significantly alter the valuation. Ensure your assumptions are realistic and well-justified.
• Terminal Growth Rate: This rate should generally be low (e.g., 1-3%) and not exceed the long-term growth rate of the economy, as companies cannot grow faster than the economy indefinitely.
• Discount Rate: This should reflect the risk of the company and its cash flows. Higher risk implies a higher discount rate.
• Simplification: This calculator uses a simplified DCF model. Professional valuations often involve more detailed projections, sensitivity analysis, and consideration of other factors like debt, cash, and non-operating assets.

This calculator provides a useful starting point for understanding a company's intrinsic value, but it should be used in conjunction with other valuation methods and thorough due diligence.