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QuestionsCategory: Valuation QuadrantValuation: PEG Ratio
Darren Seah asked 1 year ago

Hi Victor,
I noticed that in the latest update of the modules, the part about PEG ratio under Valuation has been removed. Is there a reason for it?

Victor Chng answered 1 year ago

Hi Darren,

When it comes to valuing a company, we have always been using PE, P/CFO and PB. Those methods have given us better result and much more accuracy as compared to other valuation method. Hence, decided to show valuation methods that we used instead of just theory.

Darren Seah replied 1 year ago

Thanks Victor!

If I’m evaluating a tech company such as Alibaba, Amazon etc, which method is more accurate? Using PE and P/CFO?

For practice, I’ve tried using both PE and P/CFO on Alibaba and the intrinsic value that I’ve calculated are quite different. Would such a case exist or the intrinsic value calculated using either PE or P/CFO should have around the same value?

Just to double check, the intrinsic formula using P/CFO is Latest Free Cash Flow per share x Average P/CFO ratio (for the past 5 years).

Darren Seah replied 1 year ago

sorry, i think the formula should be: Latest Operating Cash Flow per share x Average P/CFO ratio (for the past 5 years), right?

Victor Chng answered 1 year ago

Hi Darren,

This are the valuation method you should use for the following companies:

Alibaba – PE ratio – I will say stick to PE for Alibaba, there is no need to do P/CFO
Amazon- P/CFO

For P/CFO valuation use the operating cash flow per share instead of FCF per share. Most of the time, you should be using the 10 years P/CFO average unless the company is growing fast in the recent years then use the 5 years average.

Darren Seah replied 1 year ago

Hi Victor,

How do you determine when to use either the PE or P/CFO? Is one method more accurate than the other?

For example, I’ve used PE and P/CFO for Alibaba to calculate the intrinsic values. In order to be conservative, should i use the higher intrinsic value so that my margin of safety is bigger?

Thanks

Victor Chng replied 1 year ago

Hi Darren,

In most cases, you should be using PE as valuation. P/CFO is use when the company earning is being distorted by depreciation or other items. If the company earnings is being distorted, it usually have cash flow more than earnings by two times which you can use the cash flow to net income ratio to determine. Hence, if the company does not have cash flow to net income of 2x then you should just use PE ratio.

Darren Seah replied 1 year ago

Thanks Victor! I have a clearer picture on how to differentiate both methods.

To calculate the intrinsic value, is it ok if I use the latest EPS from the previous FY instead of TTM?
I guess it will be more accurate to use TTM since it factor in the latest quarterly results.

Victor Chng replied 1 year ago

Hi Darren,

If you are valuing US companies, latest TTM is more accurate but for Asian markets you can just use the latest EPS from the FY.

Darren Seah replied 1 year ago

Ok thanks. Appreciate it :)

Victor Chng replied 1 year ago

Welcome Darren :)