# Can I forecast NPAT or equity by looking at an annual report?



## ubtheboss (25 September 2010)

I'm trying to do some SP forecasts but the method I'm using requires forward looking estimates of NPAT and equity.

Those two numbers seem to be the hardest to find on the net.  So far I've thought there were only two ways to get it:

- stumble upon it
- pay a brokerage to get an analyst's estimate

I'm with Commsec but they only have EPS AND DPS forward estimates.

Then I was wondering, can I do it?  Is there a way to divine these numbers from an annual report?

Thanks


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## ROE (25 September 2010)

ubtheboss said:


> I'm trying to do some SP forecasts but the method I'm using requires forward looking estimates of NPAT and equity.
> 
> Those two numbers seem to be the hardest to find on the net.  So far I've thought there were only two ways to get it:
> 
> ...




EPS and NAT are the same just different way of looking at it 
unless you into dodgy company which use equity out capital gain and count that as profit 

I dont get bed with those companies

EPS= NPAT/share oustanding

NPAT= EPS * Shares outstanding


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## ubtheboss (25 September 2010)

ROE said:


> EPS and NAT are the same just different way of looking at it
> unless you into dodgy company which use equity out capital gain and count that as profit
> 
> I dont get bed with those companies
> ...




Hi ROE,

Thanks for that!

So now I know how to calculate NPAT forecasts:
- NPAT= EPS (forecast) x # of shares (forecast)

EPS estimates are readily available and if the # of share on issue look steady then I know my NPAT estimate is as good as I can get looking forward.  If the number of shares change during the year then I have to recalculate.

What about forecasting end of year equity for a company?

I want to calculate 'equity per share' which should be:
- EqPS= END OF YEAR EQUITY/ # OF SHARES

Apparently EqPS is the same thing as 'book value'.  Is that right?

So I guess I'm on the hunt for book value forecasts.  I could then multiply the BV by the # of shares to get the end of year equtiy forecast yeah?

Hmmmm, where to find BV forecasts....? Don't see any on Commsec.

Any tips?

Thanks for your help again


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## ROE (25 September 2010)

ubtheboss said:


> Hi ROE,
> 
> Thanks for that!
> 
> ...




shareholder Equity = how much money investors put in plus retained earning

Return on equity = NPAT / Shareholder Equity

Book value is not EPS

EPS is earning from running the business

easier if I give an example, say you bought a house for $500K and you have 500,000 shares in outstanding, then your book value is $1 a share

your EPS will be your rental income minus tax and expense

I'm not sure what you trying to do? Book value is not really any good to 
retail investors, plus there are many way to calculate book value and unless
you know how much the business pay for certain stuff and whether it appreciate over the year book value cant really help judge whether it's a
good business.

I remember explain about book value a while ago on here and why it's no good for retail investors ..I wouldn't worry too much about this number unless
you are one of those cigar butt investors who think you can buy stuff
cheaper than its book value and sell it off bit by bit... 

Also it is dangerous thinking a company under value by looking at Book Value or NTA
because a company could be overpaying for asset and it doesn't worth no where near that much
if it was to liquidate etc..


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## ubtheboss (25 September 2010)

Thanks ROE.

The reason I want to get 'end of year equity' forecasts for a company are so I can calculate 'equity per share' (end of year equity/ # of shares).

I would then use that 'equity per share' number (I call that EqPS so as not to confuse with EPS or 'earnings per share') to help in my intrinsic value calculations.

Are you familiar with Roger Montgomery's book and his method?

To use it you need forecasts for- EqPS, DPS, EPS, NPAT

Cheers


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## ubtheboss (25 September 2010)

I just found this formula for calculating 'forecast equity per share':

Forecast equity per share is:

Forecast Year Equity Per Share = Previous Year Equity per share + Forecast Earnings per share – Forecast dividends per share + new share capital(per share) – buybacks(per share)

Does that sound about right?

Cheers


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## ROE (26 September 2010)

ubtheboss said:


> Thanks ROE.
> 
> The reason I want to get 'end of year equity' forecasts for a company are so I can calculate 'equity per share' (end of year equity/ # of shares).
> 
> ...




yes I know of him, I seen him on news sites
he practise the art of value investment.

I dont know how he calculate his intrinsic value
I got my way  it takes me 30 seconds and it seems
to work so no need to complicate things.

This stuff isnt new it been around for decades
but every a couple of years someone glamorise it and 
it sells like hot cake 

there is another valuable thread on here about his stuff so you may get more information from thread
there is no doubt with good principles, patient and strong conviction you get very decent return in the market so it good to know these stuff


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## ubtheboss (6 October 2010)

Well I found Roger's equation for forecast EqPS

calculate forecast EqPS (equity per share):

Forecast Year Equity Per Share = Previous Year Equity per share + Forecast Earnings per share – Forecast dividends per share + new share capital(per share) – buybacks(per share)

But I have just come across my first challenge.  I'm trying to get forecast 2010/11 EqPS:

- I have previous year EqPS
- I have the forecast EPS
- I have the forecast DPS

Since the 2009/10 annual report came out though there has been an Appendix 3B.

http://imagesignal.comsec.com.au/asxdata/20100913/pdf/01097546.pdf

Which says 1.034 mil ordinary shares issued upon exercise of options at $2.00 with expiry date of 3 Dec 2010.

With regards to the EqPS equation, does this count as new share capital?  Or does it only count if the options are exercised???

Would 'new share capital' be something I would more likely find in a cap raising announcement?

Thanks for the lesson in advance everyone


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## mr. jeff (6 October 2010)

ubtheboss said:


> Well I found Roger's equation for forecast EqPS
> 
> calculate forecast EqPS (equity per share):
> 
> ...




add the new shares to get total market cap if you want to reflect this change in number of shares at december.

When I did a Discounted cash flow valuation (sounds like the same thing you are doing - using forecast earnings and expenses discounted for cost of money over time) for CSR I worked with their current forecasts and then you start having to make assumptions based upon what other analysts think and what you think about where the company is going in the long term. 
For my DCF valuation I used a 10 year period of NPAT. (Each year further out becomes less significant due to the present value of money getting smaller ie. $1 in 8yrs time is worth now only 80c or so) but still I ended up just finding out what I wanted to hear - that is I felt that CSR breaking up had hidden value so when I did the valuation on them, I found that they did, but not as much as I thought. I was lucky enough to get some analyst forecast earnings to help with this, but then the great realisation for me (with the help of some people on this forum) was that a company might be valued at $100 per share and trade at $5 per share for ever, no sweat. After CSR valuation I bought a load of them, then after a nice idle period for 5 months, realised my waste of money and stopped valuing things. I spent 2 days on CSR!
Hope this helps your valuing, it does work, especially if you can buy at least 20% of a company so that you can help unlock its value like Buffet can.


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## c-unit (6 October 2010)

ROE said:


> yes I know of him, I seen him on news sites
> he practise the art of value investment.
> 
> I dont know how he calculate his intrinsic value
> ...




How do you calc intrinsic value ROE if you don't mind me asking? 

At the moment I am just investing in industries that I feel have long term potential (looking at global trends) and then choose stocks within those industries based on P/E and EV/EBITDA. Mind you I haven't been doing this long so my technique needs work.


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## Vargulf (13 November 2011)

mr. jeff said:


> When I did a Discounted cash flow valuation (sounds like the same thing you are doing - using forecast earnings and expenses discounted for cost of money over time) for  the great realisation for me (with the help of some people on this forum) was that a company might be valued at $100 per share and trade at $5 per share for ever, no sweat. After CSR valuation I bought a load of them, then after a nice idle period for 5 months, realised my waste of money and stopped valuing things. I spent 2 days on CSR!




 Ahhh Jeff! I can't work out what valuation method you have been given that gives CSR a value worth buying. I though most value investors looked first and foremost at ROE... CSR's ROE is pathetically low most years and fluctuates far to much for accurate forecasts to ever be made. Not to mention it's a commodities style business with little competitive advantage. I don't wish to insult but if a venture in CSR was your attempt at value investing in my opinion you still haven't value invested. That discount cashflow evaluation I have heard of and what I have heard is that it is fairly useless on it's own. The book mentioned above, Value.able is one I have read that is helping me to value invest. It gives you the tools to analyse stocks for true intrinsic value. Its not complete but it's a great start.


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## Vargulf (13 November 2011)

c-unit said:


> How do you calc intrinsic value ROE if you don't mind me asking?
> 
> At the moment I am just investing in industries that I feel have long term potential (looking at global trends) and then choose stocks within those industries based on P/E and EV/EBITDA. Mind you I haven't been doing this long so my technique needs work.




The book frequently mentioned will show you how to do it man. It only costs 50 bucks. The first part of your strategy sounds sensible. I think 8/10 times with that approach  and some decent research you can choose strong stocks. 
But after reading the mentioned book I no longer put a great amount of faith on P/E's. "Anything with price is irrational" R.M essentially preaches. I would probably doubt some of what he says if I hadn't bought TOL and CSL a few years back. I bought CSL because it was a quality business in an expanding industry. I bought Toll because its P/E was low... I'll be lucky to get my money back from Toll in 5 years and after the opportunity cost it has taught me not to trust P/E. EBITDA... that's another figure that doesn't tell a whole lot; capital raisings, increased debts etc. can increase gross 'profits' and what is the point of knowing what a company earns before it pays any costs? The costs are the crux of whether it is a good business...
Low costs=more net profit, more costs=less.


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## Vargulf (13 November 2011)

ubtheboss said:


> So now I know how to calculate NPAT forecasts:
> - NPAT= EPS (forecast) x # of shares (forecast)
> 
> EPS estimates are readily available and if the # of share on issue look steady then I know my NPAT estimate is as good as I can get looking forward.  If the number of shares change during the year then I have to recalculate.
> ...




!!! This is fairly exciting, is this truly all analysts would need to supply the forecasts we need. Most of the companies I'm looking at aren't issuing alot more shares (kind of a theme of a value company lol). Thanks ROE for your knowledge and youbtheboss for asking the right question! ;-) (I'm using Commsec too youbboss and am in the same place as you. Having no trouble with present IV but I worry about Commsecs figures especially their book value's etc. as their return on ROE is way out from what we need and doesn't that mean their equity could be end yr figure?


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