Investment software for private investors

Valuation using Future Sales

The company’ sales can tell you the size of the business and its position in the marketplace. Sales are generally more steady and easier to predict than profits and cash flows. This method can be used to value a loss-making business, a business with a strong brand and a business with consistent recurring sales. It’s based on the idea that an efficient operator can purchase the company at a depressed price relative to its sales level and make it more profitable through superior business practices and marketing techniques.

This method requires you to project the sales 5 to 10 years from now and multiplies the estimated sales by an appropriate price to sales ratio (PSR) to get the future value of the business. This value is then discounted back to present value using an appropriate rate of return to get the value of the business.

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Valuing "RB. RECKITT BENCKISER GROUP PLC"

Valuation Assumptions

Latest quoted share price £  
Number of ordinary shares  
 
Number of years to project    
Required annual rate of return   %  
 
Latest reporting financial year    
Total cash & cash equivalents £
Total interest-bearing debts £
Sales £
Sales annual growth   %  
Price to sales ratio   x  

Valuation Results

  • Price & Value chart
  • £47.20
    Highest price you can pay to get 10% annual return
    2.8%
    Your annual return if you pay at market price £66.10
    11.1%
    Your annual return if you pay at intrinsic value £44.88
    -32.1%
    Value Vs Price variation

Projection Horizon

Year Growth Sales
2017 7.2% £10,603,152,000
2018 7.2% £11,366,578,944
2019 7.2% £12,184,972,628
2020 7.2% £13,062,290,657
2021 7.2% £14,002,775,584

Calculations

Sales in year 2021 £14,002,775,584
Market value in year 2021 (£14,002,775,584 x 3.8) £53,210,547,221
Value of company operations (£53,210,547,221 discounted at 10%) £33,039,563,381
+ Add cash & cash equivalents £765,000,000
- Less total interest-bearing debts £2,388,000,000
Business intrinsic value £31,416,563,381
Business intrinsic value per share £44.88

+Tips & Advice

  • Sales are generally more predictable than earnings and can give a useful indication of the company’s positions in its markets. Sales growth from organic operations such as price increases, new products and new markets are much cheaper and more sustainable than growth from acquisitions. Big and too many acquisitions can lead to culture clash and goodwill write-offs when the economy take a turn for the worst. Look for businesses that can generate internally funded future long-term average sustainable growth of 10% to 20%. Very high growth rates rarely last.
  • Price to sales ratio (PSR) is a measure of relative value of a share when compared with others. It can be used to compare with the market average or the sector average. Many retailers and large-scale distributors of goods would have very high sales in relation to their market capitalization i.e. a very low P/E. Manufacturers of high-value items and businesses with strong consumer brands often have high PSR. Extensive study has shown that low PSR is one of the leading indicator for selecting very long-term shares that perform well. An ideal target price to sales ratio would be a stock selling at 0.75 or less.
  • The number of common shares should be almost constant or slowly decreasing may be due to the repurchasing of outstanding shares. This helps to increase earnings per share which in turn drives up the company’s share price. A dramatic increase in the number of shares outstanding over a number of years without an increase in the company’s earnings usually means that the business is selling new shares to increase its capital base to make up for the fact that it is a mediocre business.