Definitions of key terminologies referenced on the website for determining the intrinsic value of stocks using the discounted cash flow method are provided below, along with other key terms. Variable values are provided on the downloadable file here: Intrinsic Value Index File

Discounted Cash Flows (DCF): Method used to determine a company’s intrinsic value of their stock, taking into account projected future free cash flows over a certain length of time, or indefinitely, then using a discount rate to determine the net present value of all the future free cash flows. (This is the method Warren Buffett always refers to when evaluating a company’s stock value)

Discount Rate: Return rate used to determine the net present value of all the future free cash flows, taking into account a risk premium. (The greater the discount rate the lower the intrinsic value will be)

Free Cash Flow (FCF): The actual cash a company brings in on a yearly basis. (Historical free cash flows can be located on a company’s Cash Flow Statement)

Growth Grade: Uses historical data points to determine a company’s future growth potential. Taking into account, from most to least important, the company’s ROIC, BV, EPS, Sales and FCF growths over the previous 1, 5 and 10yrs. Only results of 9.5% or greater will increase the grade value, ranging from ‘F’ to ‘A+’. With ‘F’ representing that the company did not have greater than 9.5% for any category during these periods, and ‘A+’ representing greater than 9.5% for all. A ‘U’ (Undetermined) represents a company that did not have enough financial history to determine its grade. If the grade includes an exclamation mark (!) that indicates the company’s ROIC has been greater than 9.5% during the time periods, which is the highest weighted data point in the calculation as it provides a strong measurement of the management’s efficiency in allocating capital for a high return. Though the Growth Grade and Intrinsic Value use some of the same data points in their calculations, however, they do not impact each other’s assessment as the two calculations are independent from each other.

Intrinsic Value: Inherent value of a company’s stock value. (The intrinsic value of a company can differ drastically with the stock market price)

Long Term Growth Rate: Growth rate used following the short term growth period, used to calculate the long term yearly free cash flow growth. (Should be between 1%-3%, IntrinsicValueIndex.com uses 3%)

Long Term Growth Years: Length of time into the future that the long term growth rate should be applied towards following the short term growth period. (Can be 20yrs, 50yrs, 100yrs, or an indefinite time period into the future)

Margin of Safety: A reduction to a company’s discounted cash flow stock value to take into account miscalculated projections and future unknowns to the business. (“No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Never overpaying, no matter how exciting an investment seems to be, can you minimize your odds of error”. – The Intelligent Investor)

Margin of Safety Intrinsic Value: Multiplying the intrinsic value by the margin of safety. (Never overestimate your stock valuation ability, always include a safety margin)

Net Current Asset Value per Share (NCAVPS): The Net Current Asset Value (Current Assets – Total Liabilities – Preferred Stock) divided by the total number of Outstanding Shares. Provides the liquidity value of a company on a per share basis. (The majority of the time this will be a negative number as a company’s current assets value is usually less than the sum of total liabilities and preferred stock).

Short Term Growth Rate: Expected growth rate over a short near term time period to calculate the yearly free cash flow growth during this time. (Even for growth companies a limit should be set; 12%-15%)

Short Term Growth Years: The duration the short term growth rate should be applied towards. (Typically 10yrs or less)