With all thats been said above,if doing a DCF on a company,which of the two methods are best used for shorter time periods? (eg,for a 5 year or less investment,should you use the CROIC or FCF (oe) growth rate when doing a DCF?)

Also what about undervalued companies (on a DCF basis),that have low PEG’s,& some good growth ahead?

Thanks for any help.

anyways, I’m having trouble understanding why using the croic figure is better at forecasting the future value. I mean, using the evaluation method that we all use, we add up all the cash the company ever created (SE) and all the cash the company will ever create, discounted back to today.

isn’t FCF growth fits the most for our evaluation? at the end of the day, what matter for the figure we get isn’t how much cash the company got for every dollar invested, it’s how much the company generated in total.

I can understand why FCF can be affected much more than CROIC by management actions (I guess you’re referring to the great affect it has on changes in working capital and capex – both part of the FCF calculation and due directly from management decisions) but still I don’t see a reason to use it as a growth rate.

Also, why 75% of croic? how did you get to this number?

Someone please help me fully understand this.

and Joe, thank you again for every single page in this website =)

Ziv.

You can do this with a nice dcf calculator with this link:

http://www.focusinvestor….

You can figure out IV with different growth rates and then below you can put in four different IV’s you came up with and the likelyhood (percentage wise) that it will happen. It kind of lets you get a medium intrinsic value considering different outcomes.

One thing that I do before any investment I make, is I try to map out a worst case scenario. Seth Klarman does this and has spoke about it. Try to imagine a worst case scenario for your company, and imagine how the growth rate would be effected long term, and see what IV would be and what the company would look like in that scenario.

In the future I will ensure I use the search tool more effectively.

Love your blog!

keep it up!

It is all a guessing game. Even if CROIC was 3% and FCF was 10%, but you had a reason to believe that the future cash would grow at 20%, use 20%. The past is a guide, and CROIC is a better guide than FCF over long periods.

In short, you are selling your savings too cheaply if demanding just 1.25 percent return over the corporate bond.

Graham’s original argument was that stable companies (i.e., those with stable earnings growth) could be more accurately valued because their intrinsic value could be determined in the same fashion as a bond (i.e., discounted cash flow models). Despite this, Graham recognized that firm performance was not assured over any period of time, and he required a margin of safety discount. Joe goes a step further with CROIC, in that this is what allows a firm to weather economic and sector down-turns. The intent is to follow Pabrai’s Dhandho analogy of severely limiting down-side risk while maximizing upside potential, as the market belatedly recognizes intrinsic value — “Heads I win. Tails I don’t lose too much.”