Find the evidence first
Go to the company’s official investor-relations website. Collect its latest annual report, recent quarterly results and several earlier years. For US-listed companies, check the filings through SEC EDGAR: usually the 10-K and 10-Q; many foreign issuers use 20-F and 6-K.
Read the cash-flow statement alongside the business discussion, balance sheet and notes. Look for capital spending, customer payments, inventory, debt, leases and share awards. Record both the reporting period and publication date. The SEC’s financial-statement guide explains where these fit.
It starts with a cash-generating, debt-free business, no excess cash and a fixed share count. Banks, pre-profit companies, changing debt and substantial dilution need a more suitable model. Do not force them into this one.
Cash the business can sustainably leave for owners
Question: After keeping the business competitive and funding the growth you expect, what cash is left?
For the simple debt-free case, begin with cash from operations and subtract necessary investment. Check several years: a single year can be boosted by collecting old invoices, selling inventory or delaying payments. Explain adjustments to a normal level; do not automatically average away a business that has changed.
Check the company’s own “free cash flow” definition. It is not automatically money available to shareholders. A cost that keeps returning should not disappear merely because management calls it adjusted. SEC guidance, questions 100.01 and 102.07.
$20m after operating costs, tax and working capital
− $10m for equipment and expansion
= $10m potential owner cash
÷ 10m shares = $1 starting cash per share.
Do not subtract working capital twice if it is already reflected in operating cash. Keep growth-related investment in your forecast. Share awards can dilute owners even when they are added back in reported cash flow. Debt payments and new borrowing require a consistent equity-cash model; they are not handled automatically here.
Write down: “I use $___ per share because these reported figures, adjusted for ___, support it.”
Build three business outcomes before choosing three rates
For each case, describe customers, prices, costs and the investment needed to deliver the sales. Estimate the cash remaining per share. A sales-growth forecast is not an owner-cash forecast.
| Case | Possible business story | Year-five cash/share | Annual growth |
|---|---|---|---|
| Weak | Lost orders and cost pressure | $0.8154 | −4% |
| Middle | Modest demand; investment paid for | $1.2167 | +4% |
| Strong | Better demand and execution, after expansion costs | $1.4693 | +8% |
These stories illustrate the assumptions; they do not prove the percentages. For a real company, support them with orders, capacity, margins, competition and investment requirements. A management forecast is evidence of management’s expectations, not a guaranteed outcome.
How do I turn a five-year cash estimate into a rate?
Annual growth = (year-five cash ÷ starting cash)1/5 − 1.
Going from $1 to about $1.2167 over five years implies approximately 4% a year. The worksheet assumes that smooth rate each year. If cash will be lumpy or negative along the way, use a year-by-year model instead.
Growing sales can require more inventory, machinery and customer credit. Fund those needs before estimating cash for owners. NYU Stern: growth and reinvestment.
Write down: “This case needs ___ to happen. I would reconsider it if ___.”
What return would make the risk worthwhile?
This is the annual compensation you require for committing money to uncertain future cash. It is not a promised return or a number to lower until a share looks cheap.
Start with a dated low-risk benchmark in the same currency and a relevant maturity. For US-dollar cash, US Treasury yields are a reference. Then assess the extra return needed for equity risk. Cash stability, business exposure and financing affect that assessment. A personal target alone does not establish a market-based fair value.
Professional approaches estimate a risk premium and the company’s exposure to it; these are estimates too. Match an equity-cash forecast with an equity required return, not the company’s borrowing rate. NYU Stern: cash flows and discount rates.
10% is an illustrative assumption. At 12%, with the same middle-case cash forecast, estimated value falls from about $13.9 to $11.1. Neither rate is a recommendation for your company.
Write down the benchmark, date, risk reasoning and a plausible range. Do not count the same risk twice without thinking about how it already affects your cash scenarios.
What can continue after year five?
This is a long-run assumption, not an extension of an exciting recent quarter. Ask whether the business will be mature by year five, what growth its market can sustain and how much reinvestment that growth requires.
The film uses 2% indefinitely, including eventual stabilization in the weak case. That is an assumption, not a fact. A shrinking business may need continuing decline or a finite-life model. In this formula, continuing growth must remain below the required return. Both must use the same currency and inflation basis. NYU Stern: continuing value.
About 69% of the film’s middle estimate comes from cash after year five. Test a lower continuing rate. If you change growth, reconsider the investment needed to support it too.
Compare with a dated share price
Record the quote’s date, currency and share class. Ensure it matches the cash per share you estimated. The film’s $10 and $20 prices are fictional.
Changing price changes what you would pay, not what the same cash assumptions imply the business is worth. A price below your range can mean an opportunity—or that your assumptions are wrong. None of the three cases is a guaranteed floor.
Put the film’s example together
| Starting owner cash/share | $1 |
|---|---|
| Five-year growth: weak / middle / strong | −4% / +4% / +8% |
| Required annual return | 10% |
| Continuing growth | 2% |
| Estimated values/share | $9.8 / $13.9 / $16.4 |
| Price comparison | $20, then $10 |
Try it: Open the worksheet and restore the film’s example. Change only the price to $10. The estimated values stay the same. Then change required return to 12%: the middle estimate falls to about $11.1. Ask which change reflects new business evidence and which reflects your investment terms.
Try the example →Keep the reasoning with the number
For every input, complete these five lines. Use the notes box in the worksheet and download your record before closing the page.
- Source: document, period, publication date and link.
- Reported fact: what the company actually disclosed.
- Calculation: adjustments and arithmetic, with units.
- Assumption: what you believe will persist or change, and why.
- Change my mind: the evidence that would invalidate it.
“I use $1 starting cash per share: $20m operating cash less $10m investment, divided by 10m shares. I assume the cash level is repeatable and future growth is funded. I would revise it if recurring investment needs exceed $10m without enough additional cash generation.”
No company filing supports this teaching example. A real note must name the actual documents and justify the adjustments.
If you cannot explain an input, leave the conclusion open. The useful result may be knowing what you still need to find out.
Record my assumptions →