• Check out Roger's recent interview on the Fear & Greed podcast about small caps to watch this reporting season listen here

How do your Value.able valuations compare?

How do your Value.able valuations compare?

Thank you for your encouraging comments about Value.able and all of your generous feedback. You have indeed given me enough suggestions for Value.able#2, or at least a workshop/lecture. While I consider these and in the meantime, I have received a number of questions (some of which go beyond the mandate for the book) that I think, if answered, could benefit everyone. Besides, I suspect if there is one person that has written me a question, there will be others who have the same query but didn’t write. In the interest of efficiency and to avoid repetition, here are what I believe represent the most likely questions you could have and the corresponding answers.

Question 1: Historical Information

In terms of valuations, is all the requisite historical information on individual companies freely available? You mentioned you look ahead 2 or 3 years when estimating intrinsic value.  How do you go about getting the information for this? Can you recommend a source of financial data.

Answer 1: I have discovered that all the data you need to estimate intrinsic value and apply the steps in Value.able is available on Commsec, Westpac and E*trade (Thanks Ashley for the latter!). Here is the link to a demonstration of where EXACTLY to find the data. Or click on the Source Data button just to the right.

Financial data is also available for free on Google Finance and Yahoo Finance and you can also purchase publications that have up to ten years of historical information (I am currently trying to negotiate a special price for owners of Value.able).

Question 2: Analyst Forecasts

Where can I get analyst forecasts?

Answer 2: Consensus analyst information is available on Commsec and E*trade. Yahoo finance also provides consensus analyst estimates for 6000 companies updated weekly and the 2 year forecast EPS and DPS growth can be found under the Key Statistics tab. Not wanting to be left behind, Google Finance also has consensus estimates for Sales Profit and Dividends. Click here, then click on “More Ratios” under Key Stats and Ratios over on the lower right hand side of the page. Of course, if you use a full service broker you should be able to ask your adviser for access to the firm’s online research repository. Given analyst forecasts come from the analysts, they will have estimates as well.

Question 3: What tools can I use?

Perhaps you may know what I can use to filter the “good businesses” from the “not so good businesses”?

Answer 3: Sure, I do it right here! For my Insights blog (and for me) to remain independent I will not discuss any third party products or services.

Question 4: The retention rate

Calculating the value of an infinite life asset that has a 100% retention rate and a lower ROE than the required return is a mathematical impossibility.

Answer 4: I wouldn’t ever buy such an abomination!  The most technically adept of you have suggested that where Retained earnings =100% and ROE<RR, my estimates are not conservative enough. I can see why – in theory – some of you would like to treat it more harshly with the valuation formula. However I prefer to treat it even more harshly than you – simply throw it in the bin! Why would you want to own a business where, through your inputs, you have assumed wealth destruction? The question about whether to invest or not is made in the head instantly. You don’t need a calculator for that.

Considering a margin of safety, I look for companies likely to sustain an ROE that far exceeds my required return and avoid businesses whose management retain profits at unproductive rates.

Question 5: Is value investing becoming too popular?

My concern is if there is a possibility that the rising popularity of value investing, by purchasing at a discount to intrinsic value, could spoil this method of investing?

Answer 5: There are a lot of people who worry that finding gold will immediately mean everyone else will find it at the same time and render it valueless. Don’t worry, there are vastly more investors speculating than there are investing. Even Buffett observed that after 40 years of teaching it, he has seen no migration towards value investing.

Question 6: Forecast Equity per share

How do I calculate forecast equity per share, I cannot find it anywhere?

Answer 6: 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)

The last two elements can be deduced from any announcements the company makes about capital raisings or buybacks.

Question 7: Referencing others

You refer a lot to the work of these investing giants but as a successful former fund manager, you should have had more “Roger” in it.

Answer 7: As I say in my introduction, what I have been able to accomplish has been thanks to the writings and teachings of others.  In my own investing I have adopted and adapted the frameworks suggested by many investors and academics and combined them in a way that is unique, suits me and works of course!  I have for example not found my final approach to valuation anywhere else – it is an amalgam of the work of those mentioned in the book.  I have not read about the extension of the margin of safety concept anywhere else either and the list goes on.  There is a now a rather fruitful garden but the seeds were borrowed from the great and celebrated mathematicians and investors.  Indeed I think even Buffett picked up a few pointers from others, especially Walter.  To that end here’s a well known Buffett quote that I should have included in the book:   “I don’t think I have any original ideas… I’ve gotten a lot of ideas myself from reading. You can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many new ideas on your own. You can just apply the best of what you see.”

It is my hope that now that you have the answers to these questions, you won’t have to wait for me to try and reply to emails with the same requests.

Roger… please check my valuations!

Finally, many of you asked me to check your work! I really am humbled by how many of you are launching straight into the application of value investing. Well done! Instead of going through everyone’s examples, I thought it would be much better to give you some worked examples for you to try yourself. Take these inputs and run them through the process in my book. By the end of next week I will release the answers for you to check your work against along with the substeps. The inputs are in the table. Print it and fill in the blank columns to arrive at your answers (click on the table to enlarge the image).

Ten Value.able valuations


Posted by Roger Montgomery, 10 August 2010

Click here for the answers… no cheating.


Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


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  1. Hi Roger,

    Could you please explain the math behind the multiplier formula for companies which retain 100% of earning ?

    Would gladly appreciate your help, thanks!

  2. Hi Roger,

    First and foremost, I just wanted to thank you for your work. I purchased your book through iTunes and I loved having your ‘interactives’ included.

    After reading your book, I find myself not entirely sold on one of your main concepts and I am wondering if you could clarify it for me. If a company were to pay out all of its earnings as dividends, its valuation would be EQUITY*ROE/RR. However, this assumes the valuation is equal to the present value of all future dividends – does it not? Therefore, if the company were to default today its residual value would be 0 – which we know its actual residual value would be its book value i.e. equity.

    I am wondering if the valuation equation: EQUITY + EQUITY*ROE/RR makes more sense? Or maybe I am missing something?

    Matt G.

  3. Peter Chapple

    Hi Roger an team,
    I was just wondering whether there is any way to use Earnings Per Share (EPS) to estimate future intrinsic value? I use CMC markets and they make available EPS projections 2 – 3 years in advance.

  4. Have read Value-Able Second Edition and have enjoyed it greatly.
    The question I have is from page 184 Table 11.2.
    I have tried to work out how this table works because some times to work out intrinsic value by the method shown the company return on equity is more than the value of 60%.
    Please advise how you arrive at the value of say 7.225 for 30% company return on equity ?
    Keep the good work going Roger, I have only now realized that I have been gambling and not investing. I have become a true believer and only after reading your book. Looking forward to Skaffold the 1st November.

    • It’s the one question I ask readers to go and find or figure out for themselves Paul. It’s out there and you won’t have to dig very hard. If you are going to analyze stocks you need to learn to dig a little. I also mention the sources of the inspiration in Valuable.

  5. Hi Roger and bloggers,

    I was hoping someone could help me with calculating future IV for JBH. I’ve calculated a FY10 IV of $23.66 using the following:

    RR: 10%
    EPS: 109.7 cents
    EQPS: 271.3 cents
    ROE: 45.2%
    DPS: 66 cents

    That’s all fine and dandy and I’m happy with the process.

    According the commsec, the following are analyst estimates for FY11 performance for JBH:

    EPS: 122.5 cents
    DPS: 73.9 cents

    The buyback completed recently resulted in 10.8M shares purchased for $173.3M. On a per share basis:

    = 173 300 000 / 98 507 000 (new number of outstanding shares)
    = 176 cents per share

    The last piece of the puzzle is future EQPS. I’m using the following formula:

    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)

    So calculating this for JBH in FY11:

    = 271.3 + 122.5 – 73.9 + 0 – 176
    = 143.9 cents per share

    Using this information, the future IV calculates as $19.10 (again using RR of 10%). I’m not confident of the result as the severely reduced equity causes the ROE to increase to 59%. Can anyone help me out with this?

  6. HI Roger,
    i would appreciate if you could steer me in the right direction.
    I have hopefully used your process to arrive at intrinsic values for the following but given what appear to be discrepancies in market price to intrinsic value i fear i may have made an error in setting these up.
    if you could advise me what your caluclations are as a cross check i would be grateful:
    Intrinsic value market
    Westpac 29.32 21.37
    AGL 8.63 14.19
    40.51 Woodside 18.38
    Worley Parsons 5.05 27.67 27.67
    BHP 73.90 42.34 42.34
    RIO 114.39 81.59

  7. Hi Roger,
    I have endevaoured to arrive at intrinsic values based on your process in value.able
    i would appreciate if you could steer me in the right direction.
    I have arrived at intrinsic values for the following but given what appear to be significant discrepancies in market price to intrinsic value i fear i may have made an error in setting these up.
    if you could advise what your valuations are as a cross check i would be grateful:
    Intrinsic value market price
    Westpac 29.32 21.37

    many thanks in anticipation!

    • Hi Garry, I won’t be able to right now, however there are a number of graduates here that would be delighted to check your work. You may need to repost and include your inputs.

  8. I have just set up a SMSF. I have AUD 50k.Who do you recommend for advice on buying value ‘safe’ shares atm. Or should I wait until July and see what blowes out of the USA situation.

  9. Hi Roger,
    Ran a valuation over APA today and noted something which had me stumped, so thought I would throw it out to the blog team. How can APA pay a higher total annual dividend than earnings per share – for the last 10 years! I would have thought that was a recipe for going broke? Am I missing something obvious …

    • Hey Martin,

      I am no expert in this area but the infrastructure companies profits have no correlation to cashflow,

      I don’t fully understand them so I will never invest in them but this is how they do it

      • I am looking forward to Transurban coming to the offices of Montgomery Inc for a chat in the next week or three. I look forward to sharing with you my thoughts.

  10. Hi Roger,

    I have just finished reading the 1st edition of your book. Thank you so much for making it easier for me to understand how best to analyse which companies I would like to include in my portfolio of investments.

    I’ve calculated the IV of some of the stocks you have recommended to see if I am on the right track, which has worked for Forge & JB Hi-Fi.

    However can you tell me – What multiplier would I use in instances when to ROE exceeds 60%? In my workings, I have calculated ROE for Oroton (ORL) to be 80% (2010) and 74% (2009) – Using the multiplier tables in your book – ROE stops at 60%. Have I done something wrong in my calculations for ORL? Or am I missing something altogether?

    Christine R

    • The key is not to use those higher numbers simply because they aren’t usually sustainable unless the payout ratio is very very high. In which case the formula for Table 1 can be used. Thats one solution…

  11. Hi all

    Did anyone get an IV for WOW of approximately $27.17? I used the 2010 annual report to work it out.

    It would be much appreciated if anyone could give me some of their views.


  12. Hi Roger and everyone

    I was doing my calculations for FGE Forge the other day and came up with IV of 8.50.

    It seems a bit high,,,,,what are others getting for this company?

    Very happy I bought a lot at 2.32 last year.

  13. Hi Roger,

    Just in regard to the homework,
    this may sound like a stupid question but how do you go about calculating the IV for a coy whose last FY NPAT was a loss resulting in negative ROE, eg ELD in calculating their margins of safey?



  14. From the wide variation of IV’s that are posted on the blog, it is apparent that many of you are using some numbers which may not be accurate. To assist, the following guidelines may be worth reading.

    1. Always take your numbers from the Annual Report. Do not try to extrapolate numbers by using EPS or DPS multiplied by number of shares. This will almost always give you an incorrect answer.
    2. Annual Reports are freely available to anyone who logs on to http://www.asx.com.au/asx/statistics/announcements.do Just enter the ASX code and click on 2010.
    3. There are only 5 numbers required to perform an IV using Roger’s method. That should be easy to get right shouldn’t it ? Guess again.

    NPAT This is the profit after tax shown on what is usually the first page of the financial report. You should ignore any numbers attributed to “minority or “non-controlling interests”.

    Equity This is shown at the bottom of the page labelled “Statement of Financial Position” – what used to be called the balance sheet. Again, ensure you leave out those minority interests.

    Lst Yr Equity Right next to it on the same page, again ignoring minority interests.

    No. of shares Buried deep in the notes to the report, usually under the heading “issued capital” or “contributed equity”, Look for the number at the end of the year.

    Dividends This is the easiest to get wrong, as it appears in several places, and each number can be different. The place to look is the page headed “Statement of Changes to Equity”, which usually follows the Statement of Financial Position. Be careful to exclude any numbers in the minority interests column here too.

    Finally, on reports where there are two sets of numbers under headings like “Parent Entity” or “Consolidated” you should always take the larger set of numbers

    By way of an example, you might like to look at the WOW Annual Report to check their numbers. Note we will use the numbers under “Consolidated”

    NPAT (Pge 88 of the AR) $2020.8 – note the figure of $17.2 for non-controlling interests which should be ignored.

    Equity (Pge 91 of the AR) $7570.4 – note the figure of $247.3 for non-controlling interests which should be ignored.

    LY Equity (Pge 91 of the AR) $6812.5 – note the figure of $244.8 for non-controlling interests which should be ignored.

    No of Shares (Pge 137 of the AR) 1,231,139,756 at the top of the page

    Dividends (Pge 95 of the AR) $1349.2 and once again, note and ignore the figure of $16.8 for non-controlling interests.

    There you have it. All you need to do is select a RR% and perform the calculation. Remember that the higher the RR%, the more conservative your IV will be, and conservative is good !
    Using 10% for everyone (or, in my opinion, anyone) is sure to give you some over optimistic valuations. Good Luck.


    • This is very helpful. Don’t we also need one more number, ie EPS, to work out the payout ratio?

      • BWT Natalie,

        What has not been mention is that there is much much more to investing then being sble to calculate IV

      • You can work out payout ratio from the dividend and profit figures from the annual report (in fact this is the way you should work it out)

      • Hi Natalie,
        You only need the five figures Ken mentions and as Matthew says working them out this way from the Annual Report is best. You are then getting them from the horse’s mouth so toi speak.

  15. Hi Roger,

    Firstly, let me compliment you on your excellent book. Like others I’ve gained valuable insights into investing, appreciated the clarity of your explanations, your willingness to provide subsequent support through your website and comment on a wide range of interesting and topical issues, and I’ve developed a strong sense of commitment to the approach you recommend. I’ve enjoyed doing the research and the systematic approach is yielding strong returns.

    One thing I don’t yet understand is the thinking behind some of your quality ratings (MQRs). I readily accept the characteristics of quality businesses (pp. 226-227), particularly those with rising intrinsic values. I’ve also heard you recommending a longitudinal perspective, looking for companies that reliably produce high ROE and avoiding companies that record losses.

    Against those characteristics, then, I have difficulty understanding how companies like ISS and ACR warrant an A1 rating. The former has a volatile ROE track record, and the latter recorded negative ROE in 8 of the last 9 years. Both companies must have other features that strongly compensate for their poor record on these key performance indicators.

    In contrast, I’d be very interested to know what quality rating you have given ANG and TSM. Both appear to meet all of the criteria you recommend and yet neither is in your lists of A1 or A2 companies, although your post of 22 May 2010 listed ANG as having one of the largest gains (98%) in intrinsic value over the years. On my calculations both companies recently had substantial margins of safety. Both have risen in price, but TSM is still considerably below my estimated IV ($1.00) with 12% RR (admittedly based on a single analyst’s forecasts which may be overly optimistic). TSM has a particularly strong competitive advantage in Australia, with prospects of a significant expansion in its business through its timely launch into the UK.

    I would welcome your reply, Roger, as I am keen to develop my understanding of the underlying principles. Please keep up the great work – it is very much appreciated by all.

    Pat T.

  16. I know this has been a hot topic of conversation but at risk of revisiting it, I’m interested to hear others thoughts on calculating dividends paid.

    As far as I know there are quite a few ways:

    1) DPS figures from CommSec, E*TRADE etc – as has been said numerous times, the results from valuations based on this figure can vary wildly

    2) Cash flow statement – shows the dividends that actually left the bank account in the financial year (ie the final div from the last FY + the interim div from this FY). This therefore does not include the final dividend paid from this year’s earnings (it is substituted by the final div from the last FY) and does not take in to account dividends paid as shares.

    3) the Statement of Changes in Equity – once again includes the final div from the last FY + the interim from this FY, but does include dividends paid as shares

    4) the Notes to the Financial Statements – will lay out the details of dividends including special dividends and whole dollar amounts paid

    5) find out the dollar value of the interim dividend (can come from the notes to the financial statements), and then calculating the final div by multiplying the number of shares on issue by the final dividend declared

    Personally I like the final option as I think it is the “purest” and will more accurately track a company that has strongly fluctuating/growing earnings (and dividends). However, as Roger rightly says, the most important thing is to be consistent over time.

    Any comments any one? Suggestions? How do you do it? Do you have another way to add to this list?


    • Matthew,

      You are obsessing with this aren’t you ? (Just joking) My answer is contained in the post down the page, (which Roger is happy with). The statement of changes to equity is the ONLY place to get the right answer, and drp numbers don’t come into it. They are accounted for in the increased number of shares on issue, therefore affecting the EQPS.

      Regards, Ken

      • Everything value investing has become an obsession in the last couple of years!

        Thank you for pursuing this as well. I think we can finally put it to rest.

        I hope you had a great Christmas,


  17. Hi Roger
    Your book is fantastic. So easy to read and digest and the logic compelling. Thanks for making something that seems so complicated in the general media and population straightforward.

    In the last copy of Money magazine you have intrinsic values for DCG, FGE and MCE at $2.27, $4.45 and $6.02 respectively.

    I calculate them at $0.43, $12.57 and $5.63. Are you able to post the NPAT, equity, no. shares and dividends you used in the Money calculations so I can work out where the differences are?

  18. I have just purchased your book and am reading it with anticipation and am not finished yet.

    However I see that you do not favour use of P/E ratios.

    Are not high earnings, per share price, one element, among others, in ‘Value” investing?

    Critical I personally believe.

    Along with low debt and a good outlook.

    But not earnings.?

    Hard to believe.

    John W

    • Hi John Wilson,

      My thoughts on the P/E ratio come directly from Buffett’s work on the subject and the relationship between intrinsic values and P/Es. I will wait until you have finished the book and see if you qualify your remarks.

  19. Is it possible to garner from you the formula used to compile the data presented in Table 11.2 on page 184 of your book ?

    Thanks in advance

    • Hi David,

      I am not providing that information just yet. But stay tuned as I am working on a better way to deliver it than the table in the book. Some have suggested a CD. I think that sort of thing is a good idea.

    • David,

      If you spend an hour or so in Excel playing with the ratios from table 11.2, I reckon you’ll crack the formula easily enough. Then you’ll probably be left wondering about the significance of the “magic” exponents 1.8 (for ROE>RR) and 2.2 (for ROE<RR). I'm looking for a theoretical basis, but I would not be surprised if they came from the practical experience of some wise men.


  20. Balance sheet:
    I am still learning to read balance sheets. For example with the balance sheet data as available how do blog readers appraise the financial data published and downloaded.. To invite discussion and the wisdom of others with data from http://moneycentral.msn.com as a source for data for ITO (type in AU:ITO to get data). How do I compare this to etrade data extracted below. I got a calculated ROE of 49% and an IV of $21.83 using etrade data.
    Code ITO
    Net profit bef. Abnormals 1,865,582,000
    Current equity 3,550,083,000
    Div. payout ratio 0.16
    book value eqps $1.57
    Prior years equity 4011400000

    When I compare the data from the 2 sources I get confused. Request comments on the etrade published Profit and that of moneycentral and also the payout ratio published.

  21. Not sure which is best blog to post on

    After reading Value.Able I have a lot to learn.
    Questions for the blog readers.
    How and where do you get your market data and at what price? People like me are very small minnows in the investment which limits the price I am pay to pay for data.
    How do you automate the process and the calculations?
    I found I could use Morningstar to filter all listed ASX companies with Zero debt and obtain other data to apply Rogers formula (need an industry name for Rogers formula for IV- any suggestions?!!) for IV but did not have the prior year equity. I needed to input prior year equity manually – last years equity I extracted from Etrade.
    Used a simple excel spreadsheet but to look forward and backward this is cumbersome. I expect this will be more cumbersome as years go on. Why download data when it is held some here else?. Is there room for some clever data provider to provide the calculations and allow various filtering options? Maybe if the IV calculations are public Mr Market may elect to not pay excessively optimistic prices.

  22. Roger
    Like many others, I can only say a huge ‘Thank You’ for a work that is relevant to the Aust. markets. Your book explains methods than can be implemented to give us a value.
    Having used a third party program for years, I have been perplexed when it comes to how to reasonably value co’s with limited accounting knowledge. Relying on 3rd party valuations to compose a portfolio is to my mind not ok for individual investors.
    The choice of RR makes a big difference to valuation. Multiply that by the difference that the choice of ROE figure makes and we often get a very wide range in the IV figure. And all based on unknown projections of EPS that can swing wildly. In your opinion, is it better to thus work the numbers on past known metrics (Buffs rear vision mirror) and look at future sustainability rather than future profit projections? How do you rate the overall accuracy of Analysists 1 and 2 yr.
    forecasts generally??
    Thanks for any input Roger
    Steve P.

    • Hi Steve,

      I do think that a demonstrated track record is important but I also believe you need to get the best idea you can about what the future really holds for a company. Is the intrinsic value rising or falling using conservative estimates…

    • Hi again Steve Potts,

      Just realised I didn’t answer the second part of your question…I think analysts forecasts get more accurate as the year progresses. You will see many research papers that demonstrate inaccuracy early in the year and then widespread upgrading or downgrading (refining) as we get closer to the reporting date. Hope that helps.

  23. Hi Roger

    Firstly, great book. I’ve been into Value Investing for a couple of years now, but this book has really explained a lot of complex issues in a simple, easy to understand way without being patronising, nice work and thank you.

    For a while I’ve been trying to formulate a way to come up with a good guess of intrinsic value, thanks for saving me too many more endless hours of frustration with Excel spreadsheets!

    My one question came up when researching Matrix Composites. This may be due to the fact it’s only a recently listed company and in the early stages of growth. I worked out a ROE (averaged out over this year and last year) of around 49% and (using consensus estimates from analysts) similar high ROE for 2011 and 2012 (mid 40’s off the top of my head). Now, these are impressive figures but wasn’t sure about the long term sustainability of such high ROE, for example as the company grows its equity, it may be more realistic (but still good) to have a ROE at some point in the future around 25-30%.

    The question is, would you use the current (high) or an anticipated (best guess) future ROE when trying to get an idea of intrinsic value.

    (Just for the record, I tried both and still managed to find a margin of safety and have invested in the company)

    • Hi Pete,
      Thanks for your question about Matrix’s ROE and for the encouraging words about my Book. I think its worth going to the Matrix website. You will find the company has been in business since 1982. Always use the anticipated best guess for your ROE estimate.

  24. Hi Roger. Just wondered at what % point (approx) below and above intrinsic value you buy and sell respectively ? Also do you have a value and rating for IMF ? It’s my first attempt at intrinsic valuing, the attraction was no debt but looks to be in a volatile business so after adjusting some figures as you suggest (in some cases) my value ranges from $1.62 to $2.18. Current price $1.37. Thanks.

    • Hi Nev,

      I am sure you have been reading my book. The chapter on when to get out should help. I hope it does. IMF could have some very big wins, just keep in mind it will be lumpy. Reminds me of a Buffett comment: ‘I’d rather a lumy 15% than a smooth 8%” Or something like that…

  25. Hi Roger/ Bloggers,

    I’m trying to do an IV on David Jones based on their 2010 annual report but their NPAT is actually a loss. Trying to use a negative number with the value.able method has me discombobulated! A negative NPAT gives you a POR of -1.13; a ROE of -12.41%. Since tables 11.1 and 11.2 don’t have negative ROE columns I’ve come to a full and complete stop. How do you do Steps 1-4 when your company is reporting a loss? (I imagine this would also affect your numbers for 2011 but I haven’t attempted forecasting IV yet. Still practicing.)

    Can anyone shed some light on this for me?

    Mucho thanks!


  26. Hi Roger,

    What I have noticed so far is that the ‘required return’ variable is immensely significant to the valuation result. A difference of 1-2% could be the difference between a strong buy and a sell.

    You do go into quite a bit of depth explaining the philosophy behind the figure and what variables affect it, however I am still confused in determining the number to use. (I see from the valuation exercise that RR ranged between 10-14%)

    Maybe you can help clear things up for me. Book recommendations regarding this area or the derivation of the valuation formula in more extensive detail would also be widely appreciated.

    Thanks Roger!

  27. Thanks for your reply Roger. After posting I actually re-read the latter parts of your book and found your answer myself. Thanks for taking the time to clarify regardless. On that note, I really commend you on your blogging work and openness and willingness to converse like this with the general public.

  28. Hi Roger

    I was examining with great interest your document on where to find the source data when I noticed your frustration with E*Trade’s poor display of balance sheet data. The important information to look at is the latest and that is off the screen. By the time you scroll to the right using the scroll bar at the bottom (usually more than a page away) you have lost your place because the row headings have disappeared.

    I discovered (by accident) that once you left click inside the data window, the left and right cursor arrows also scroll the data left and right. Using the arrows you can quickly scroll while your eyes are focused on the line of interest thereby not losing your place.

    Hope this helps.



  29. HI Roger.
    I have purchased your book and must say it is a great read. I love the relevance to Australian markets.

    I have a quick question. Your book as I have read it, places a large emphasis on companies with sustainable high ROE and low payout ratios (as well as no/low debt, strong competitive advantage and strong free cash flow) in order to create high levels of compounding growth and ROE. I have been looking closely at a number of companies and one springs to mind that I notice you have recently added to your A1 list. DWS is the company I refer to.

    DWS’s payout ratio as I quickly calculated was just over 80%. With a ROE of over 30%, it seems odd that they would employ such a high payout ratio. Is the payout ratio a showstopper for you? ie: Is a low payout ratio a box that must be ticked?

    I have come across a number of similar companies which consisten high ROE, but the payout ratios lower my intrinsic valuations. Apart from the high payout ratios, these companies tick the rest of the boxes.

    • Hi david,

      Not at all. You have misinterpreted the argument and missed a couple of caveats I put in the book. I am equally happy to buy a business that generates a high ROE and adopts a high payout ratio. Its just that it is not worth as much and you have to pay a lower price (all things being equal) in order to get the same return. if a company cannot employ capital at high rates of return or cannot employ all of their retained earnings at high rates, then that portion should be paid out.

  30. Hello Roger

    I have just ordered your book and cannot wait for its arrival. I just have a quick question , do you have a minimum recommendation on the amount of money one should spend per business? I have a young family so I really want/need to start thinking about wealth creation now but do not have a great amount of starting cash, $5000, Is that too little amount to split between 2-3 businesses or would i better off finding one quality business, taking into account that Etrade charge $30 brokerage. Im also looking at putting $5000 annually towards more buys. I know these are small amounts but I really want to move into shares as I already have a rental property and cash in a 6% interest account, and at this time in our lifes $5000 annually is our maximum budget.

    Thankyou for your time and advice


    • Hi Nathan,

      Looks like you need to hear some suggestions or opinions from an experienced planner. I know there is a very large population of planners who read this blog, so would anyone like to offer Nathan some suggestions on a non-advice basis (provide AFSL so that I can check bona fides). I can say that if you have a mortgage that you are trying to reduce using after tax dollars, there is a very high ‘guaranteed’ return available from simply paying it off.

  31. I am very interested in your line of thought and methods.

    Do you have performance figures or tables available to look over?

    John W

  32. Hello Roger

    I’m attempting to value MND
    my value is significantly greater than the valuations of yours i’ve seen

    am i doing something fishy. or is there something else going on ?

    any insight would be most appreciated

    here are my calcs:

    Monadelphous 2010
    Equity(millions) 144.286
    Shares(millions) 859.10364
    Equity / Share $0.17

    Earnings Per Share (EPS) 91.9
    Dividends Per Share (DPS) 79.8
    payout ratio 86.8%
    Net Profit After Tax (NPAT) 83.217
    average Equity 133.43 (2009 +2010 = 122 +144 / 2)
    ROE 62.4%
    RROR 14.0

    pay 100% multiplier 4.29
    retain 100% multiplier 13.73

    EPS * pay100%multiplier $12.26
    EPS * retain100%multiplier $39.26

    $12.26 * payout ratio $10.64
    $39.26 * (1-payout ratio) $5.17

    Value = $10.64 + $5.17 = $15.81

    • Hi Bill,

      Thank you for your post. My standard reply to check your calculations is: “with reporting season going full speed, I simply will have to delay any checking of calculations for some months. I will also post another set of examples for you to compare your work against.” But you have set out all your numbers really clearly. I am certain someone here reading the blog can is now qualified to check your calculations. Who’d like to have a go and check Bills work for me please?

    • Hi Bill,

      You were almost there, but unfortunately an error has occured with your calculation of equity per share, or as you put EPS, and your payout ratio.

      Payout Ratio = $67.9m Dividends Paid / $83.2m NPAT = 81.6% Payout Ratio

      MND’s equity per share = $144.3m of equity / 86.04m shares = $1.68 of EQPS.


      EQPS * pay100%multiplier of 4.29 = $7.21
      EQPS * retain100%multiplier of 13.73 = $23.06

      $7.21 * payout ratio of 81.6% = $5.88
      $23.06 * (1 – payout ratio) = $4.24

      Value = $5.86 + $4.24 = $10.12

      Hope this helps.

      • Hi Bill,

        I have just finished Roger’s book and have started doing these calc’s as well
        for MND I get for 2010 $9.39. The only difference I have from Marks comment
        is the amount of Dividends paid, from Commsec and MND Website they both have DPS as 83cents/share which is a total of .83 x 86.04 shares = 71.41 Million
        this slightly alters the Payout ratio. But as Roger says in the book if you value it at $ 9.39 and someone else value’s it at $10.12 and it currently trading at $14.67 then the accuracy is not that important as the stock is not trading anywhere near the level you want to allow a good safety margin, to buy the stock I would like to see a price of about $ 7.88. Cheers Rob

      • Hi Mark

        it does indeed
        I had 2 issues
        firstly i’d entered the incorrect # shares
        and then – my xls calcs were pointing to EPS ratio on the incorrect column

        thanks for your input/assistance


      • Its worth reading the reviews on Amazon of Richard Simmons book. Some are very uncomplementary.

      • Thanks Roger. I am very aware of those even before I wrote my book. As I say in my book. On their own, the valuations formulae are incomplete. But combined they work well.

      • Hi Mark
        Jeez I wish I’d listened a bit more at school. I’m obviously missing something. How do we arrive at the ‘$67.9m dividends paid’ figure. I’ve been dividing theDps by Eps to get POR but this mustn’t be right looking at your figures. I’m using Bell Direct analysis and most things are the same or very close but I can’t find the ‘Dividends Paid’ anywhere

    • Hi David,

      Its an excellent question and I have debated it with several analysts. I have concluded that it matters if your time frame is short. The longer your time frame, the less it matters.

  33. Hi Roger
    I have read your book, but looking at the company examples that you posted a couple of days ago I am lost, as your dividends are so different to the data I am using. Using Etrade for CPU dividend is .328 a share, 556M shares =$18.23 which is 49% payout ratio which Etrade also says but you have a $92.6 payout which equates to 36% ratio. Or CTX Etrade .25 a share dividend, 270M shares=$67.5 or 21% ratio you have $186.3 which is a 59.2% ratio.
    I know you said go to the annual report but when I have with other companies the Etrade dividend per share is the same as reported.
    Please help me.

    • Hi Allan,

      The difference can only be attributed to timing. Declared dividends versus paid dividends. Over time, as long as you are consistent with the number you use, you will end up reaching the same conclusions about the company.

  34. Hi Roger. Enjoying Value.able immensely. Well done. A few questions have come up. Perhaps we can take them one at a time. In your discussion on the calculation of the Discount Rate (Required Return) you talk about one particular method in which you summate the long-term compounded rate of global output, plus inflation, plus an equity risk premium. The resultant number (a little over 12%) is I believe actually a pre-tax figure, yet you input the nominal amount into your tables as an after-tax required return. Can you explain this discrepancy? Also a subsidiary question: Would it ever make sense to use a Required Return equal to or less than the long-term average return of the market as a whole, as this can be obtained without (or with minimal) company-specific risk or specific company analysis simply by indexing? Many Thanks.

    • Hi Bree,

      Both are after-tax if you are conservative (note bond rate is not included). Using a number that is less than the long term market return would not be conservative. I see the convenience benefit, but short cuts should generally be avoided in investing.

  35. Roger,
    I have been reading your website material since Friday when I saw you on Sky business, and I was so impressed by your sensible approach to investing that I have ordered your book. I don’t have the patience to wait for it to arrive, so I borrowed a copy from a friend last night and I have done the exercise on the companies shown in your table.
    I have 2 questions; viz,
    1. When I multiply the shares on issue by the dividend per share, I don’t get the same answer as you have for any of these companies.
    2. You appear to use the net profit figure, rather than the net profit before abnormals, as shown on the Commsec website. (If I multiply the “per share” earnings figure by the number of shares on issue, I get another figure too) Confusion reigns.

    Would you please clarify ?

    • Hi Ken,

      I am adjusting for abnormals where obvious. I see that you are going to the annual reports to match the data. Its sounds like I need to run a separate course on identifying the right numbers. For now, please just use the numbers in the table.

  36. Thank-you Roger for the valuation insights in Value.able. As a former fund manager I have always tried to think like an owner and buy into high ROE, low debt companies with sustainable competitive advantages. Having never been entirely comfortable with the accuracy DCF models, I have previously used a cash flow return on investment model (CFROI) and PEG ratios, the later of which you rightly point out have the weakness of including price as an input.
    Your valuation approach including your multiplier tables makes the task of determining intrinsic valuations that much easier – I applied your methodology to REA and came up with a 2010 valuation of $11.28 and a 2012 valuation of $14.30 using a 10% required rate of return and a 55% ROE. I will now calculate the intrinsic valuations of each of the companies that I own shares in to ensure that I have a sufficient margin of safety in each of them – fortunately I run a Buffettesque focus portfolio so there are not too many calculations to do!
    The only tricky one will be Fleetwood now that it has announced an acquisition of a private business without yet disclosing the earnings or ROE of that business – as you point out companies stating that an acquisition is forecast to be eps accretive in year one is not all that helpful to analysts!
    Thanks again.

    • Hi John,

      Great to hear from you! With FWD we may be forced to wait six months for the results. Whether they choose to disclose or not, we will find out. Thank you again for your kind words in support of Value.able too.

  37. Hi Roger do you see CAB trading at a sig. discount to IV now @ $4.39 per share (down from $5.63, 2010 valuations) or has MR Market punished the share price in line with your expectations ?

  38. Hi Roger,

    I note from your JBH example in your book that you calculate ROE as NPAT divided by average equity for the year. Makes good sense.

    So, if we are looking to value JBH today, or some time during the 2010/11 year, we divide the forecast 2011 NPAT by the average of 30 June 2010 equity and forecast 30 June 2011 equity.

    My question is, what equity and share numbers do we use to calculate the equity per share – the starting figures (30 June 2010), the end figures (30 June 2011) or the average. Often this will make little difference but in the case of companies like REA with a high reinvestment rate, the book value could change by more than 20% from one year to the next. It seems from your example on page 188 that you use the forecast figures from the end of the year (ie in my example, 30 June 2011).

    • Hi Paul,

      I do use the ending figure in the book however you are free to use the average. Just keep in mind, not to use the beginning and to always use the same number longitudinally.

  39. Hi Roger, Absolutely Looovvve your book so far – I really appreciate that you are willing to share your knowledge and not hide it like many professionals do or only offer on little teasers – you have a gift of imparting quite technical stuff in a way most people can easily understand.

    I was going thru my own attempt at calculating the intrinsic value of WBC and using your data and arrived @ $25.96 and wanted to do the same for a number of other ASX listed stocks using the westpac brokering site financial information. I noticed that some of the data you used for WBC was different than the wetspac brokering site lists. For example NPAT (3441 from you and 3446 in westpac) etc and what really seemed to alter the intrinsic valuation between your data for WBC and westpac brokering data for WBC was the Reported Dividends you gave us (2988/2928.8 = $1.02 per share) compared to the dividends per share in the westpac brokering site of $1.16 per share. This affects the payout ratio by a fair amount and subsequently the ending intrinsic value you get for WBC ($25.96 using your data and $24.57 using westpac). After some searching on the web and westpac’s 2009 full year profit announcement PDF from their website, i was able to locate the Total dividends paid figure of $2988 on page 126 which you used and just wonder why the data in their own brokering site its different ???. Should one “trust” the data in a company annual report more so than brokering site’s data which seems to be close but not always the same…or am I just missing something or have much to learn still sensai!!

    Thanks for your time :)

    • LHi Darren,

      Thanks for the great feedback about the book. I am delighted that its having such a positive impact on your investing. As I have said previously here regarding the data; you can take short cuts but the annual report is the best source.

  40. Hi Roger,

    You mention the iconic KO in your book. Wondering if you could please mark it down for some analysis and commentary in a future post? Thanks Roger.


  41. Hi Roger

    I’ve just been through the work table and it will be interesting to see how my valuations compare with yours.

    The percentage used for the investors required return though has me troubled. Using the numbers in your worktable i came to a valuation for MMS of $6.03 at a RR of 11%. If the RR were 10% or 12% this changes the valuation to $7 and $5.26 respectively. This is a very large gap and depending on your return you could think it’s currently very expensive or trading at a small discount. Who is right as both have followed your method to calculate intrinsic value?


    • Hi Andrew,

      You have hit on the reason why Munger said “Because my guesses are better than yours” when he was asked what made him a better investor than most. I have discussed the choice of discount rate in the book. Go and review it and when you consider the rate think; too much of a good thing is wonderful. Being conservative means a higher rate.

  42. Thanks for your book (well at least the first 12 chapters, more to go). I used the method in the book to value Tabcorp which i have owned for sometime and was suprised to come up with a current valuation above the current share price (about 5-10%). Despite this, other sections of your book make me doubt that the value may be that high. In particular, I read the financial statements and discovered that a significant proportion of the assets are intangibles such as ‘goodwill’, and gaming and wagering licenses
    (which are about to expire). I understand that TAH is not an A1 company, so I’m interested in how factors such as these are factored into future valuations. I suppose I have doubts about ROE remaining around 15% as forecast? I’m guessing it is best to go with conservative inputs/here (ROE/RR)?

    • Hi Matt,

      By being conservative you will inevitably miss “opportunities” but those that do fall into your web, will be the kind that you would be happy to own even if the market were closed for three years.

  43. Hey Rodger, Thanks for all your great work and insights! Exploring business’s is actualy quite fun! One question, although its a rarity I am sure but how did you value a business with ROE like Oroton, did you take a conservitive approach at 60% from the tables in your book? Having a bit of trouble with it using the 60% along with such a high payout ratio!!! Also from my limited perspective Oroton looks like a business that could really succeed expanding overseas and they have taken some tentative steps to do so I think which is exciting.Thanks again, really loved the book.

    PS: Can you please call your mate Sally at Oroton and tell her to lower the flippin payout ratio,lol. Her record is amazing what a champion!

  44. hi Roger, first of all, great book! written clearly with clear methodology. i have to say that i enjoyed it more than buffetology. i also think the relevance to Australian companies is also great!
    now to my question:
    would you consider investing in a company that trades at a premium to FY10 valuation but at a large discount to FY11 valuation?
    im referring to RP Data. my FY10 value is $0.85 (ROE 24%) and FY11 value is $1.45 (ROE 32%). (current price $0.95)
    the other question is whether RP Data, after the acquisitions they are involved in, is investment grade as they will have $60 million in debt.
    do you think its excessive for their size? (their business has good brand, competitive moat and large American shareholder).
    cheers Ron.

    • Hi Ron,

      WIthout recommending or advising you to do anything at all; hypothetically you could buy a stock at a discount to 2011 but at a premium to 2010, however as was seen with JBH, which was in precisely the same situation, you need to be prepared for declines and therefore bet invest the farm on one roll of the dice. My preference of course is to wait until I get all the boxes ticked and one of those boxes is a discount to the current intrinsic value.

  45. Hi Roger

    Can you suggest any websites or online brokers that offer the service to do Stock market Scans. For instance, if I am wanting to scan for companies that have higher than 20% ROE and lower than 25% debt to Equity ?


      • Hi Peter, on etrade it is under “quotes and Research” “Tools” “Advanced Stock Filters”

        Be Careful as it can throw up some funny things. For example if a company sold off a segment of it’s business or even one off it’s businesses and accounting rules say it is not an extraordinary item then it will artificially inflated ROE.

        I run this report with 20% ROE and 30% debt once a year as like valuations it does not change much

  46. If people really really need the formula for Rogers Valuations give the book to a maths teacher or professor and they should be able to work it out.

    If they can’t and your kids go to that school or uni they take them out

  47. Hi Roger,

    Great book am really enjoying reading it.

    This may be answered in the book so if it is just ignore this question. I am only up to chapter 6.

    A quick question about the dividends in the above table. I will use wow for this example. The dividend total payout for the year is $1174.3 which corresponds with the amount in wow finanicial reports. This equates to a %63 payout but on comsec,etrade etc… financial they have a dividend payout of %69. This would total $1266.
    It isnt great but am just curious as to how the difference has come about.


  48. Hi Roger,

    Love the book so far, one question if I may.

    Once you arrive at a valuation and purchase a share based on a factor of safety, how far do you allow a revision (say to ROE, EPS growth etc.) to the valuation to move, before you consider selling the share? Particularly if the revised valuation is markedly downwards.



  49. Steve Moriarty

    I thought I might throw a couple up to start….

    I have WOW @ $23.76

    MMS – $4.42

    Hey this is fun!!

  50. Hello roger,

    Iam enjoying the book and I find it very interesting when I implement the methods and calculate my own valuations.

    Just with the recent announcement from JBH, what is the best way of forecasting the company’s intrinsic value without relying on a stock broker analyst for there review and personal opinions.

    Do we place a safety factor on the companies forecast or do we follow what the company is telling us?

    Thank You


    • Hi John,

      First go back and have a look at whether the company typically exceeds its guidance or not. Then you should have some idea about how to respond. Just to add, always be conservative. better to miss an opportunity than suffer from a permanent loss of capital.

  51. Hi Roger,
    I know you forecast companies based on analysts forecasts; but for small
    companies is this possible?

    Looking at LMC, which you said was valued at around $4 in a previous post a while back; I have attained an $8 value for ’09 (but ROE is 20% in 09 V 9%
    in ’08[for which my value is $3 for ’08]) They have paid special dividends
    in the past two payments (50 cents and 66c compared to 14c and 15c the year

    Given its volatility and lack of analyst research on the company (and
    others alike) – how can one predict future ROE and hence future intrinsic
    values? Would one solely rely on the outlook given in company announcements if there is no research to look at?


    • Hi james,

      As I have indicated previously, I produce a range of values. Not only by changing the inputs, but as I mention in the book a different formula too. Those special dividends, if they exceed the earnings, need to make the payout ratio 100%. if research is not available you can ask the company/ attend an AGM or EGM or call them up. If they aren’t willing to speak to shareholders then you might also get some insight into what they think of their owners.

  52. Hi Roger,

    I am currently using Comsec for my figures to calaculate Intrinsic Values.
    I have access to Morningstar but it seems that the only info given is
    dividend history, shares on issue etc… and not ROE, Book Value, Payout
    Ratio etc… Is there something I am missing?

    I have come across Cash Converters, which I estimate at around 73 cents
    (which you can buy at 56c – around a 25% discount to intrinsic value.)

    Having looked at a prior post regarding CCV, you made the comment “I think
    the company’s true competitive advantage is not listed in the table the
    presentation provided.”

    Would this competitive advantage be in relation to its position in the
    market place (i.e. it is a category killer – the first thing people think
    of when they need to sell something fast?) If not, what does its
    competitive advantage relate to?

    Also, since its operations are in both the U.K and Australia, does this
    entail more risk and hence a higher margin of safety required?

    Also, CCV have a 30%+ cornerstone investor. Does this make it a safer
    company to invest or potentially a more restrctive investment?


    • Hi James,

      A cornerstone investor is a double edged sword. Regarding CCV, I was making the comment that I was concerned management hadn’t really identified their own competitive advantage. With regards to morningstar’s data, are you looking at the Compendium?

  53. Hi Roger,

    I would like to add another part to question 3, what if a company’s ROE is greater than 60%? I contend that it would probably be more prudent to use a conservative value for forecast ROE, but what about a past year’s ROE being greater than 60% (e.g. ORL, PTM)?


    • Ahhh Yes, the absurdly high ROE. Do you think that is sustainable? Perhaps long term only if 100% payout ratio is adopted in which case you have the formula to apply it.

  54. Hi Roger,
    Can you please clarify the forecast equity per share calculation. I presume that the formula is “+ forecast year earnings – forecast year dividends”. Is this correct?


  55. I am a bit perplexed as there seem to be some differences in your data to Commsecs research section?

    For instance, Commsec shows CPU Current equity at 1101 and yours 893.56.

    With regard to WBC current shares, theirs is 2940 and yours 2928.8

    There are other differences too. It seems to be quite random. In most cases they agree with your data but in others its quite different?

    Accurate data is important so I am wondering about the validity of Commsecs data?

    • The single best source – as I have always suggested – is the annual report itself. You need to know that data aggregators use lowly paid staff overseas to input the data from the annual reports. There is bound to be human error.

  56. Hi Roger.

    I also do not consider buying business’s with a lower ROE than my required return. (unless a forthcoming change is evident). I thought your table should show these as zero. But thinking further the table would not then work for a mixed retained/payout situation.

    I totally agree that intrinsic value is nothing factual – it’s an estimate. How good your estimate is depends on how good your guesses are. The really important guesses for growth business’s revolve around how long superior ROE is sustained and how much capital can be employed at the superior returns.

    Being a long term investors we can largely dispose with the uncertainty of what purchase multiples the market is going to apply but we still need to make good guesses for ROE sustainability and payout ratios.

    These guesses need to be made uniquely in light of the business being considered. Your table 11.2 makes these guesses in a generic fashion. For me that is not good enough and that is why I have attempted to engage on the subject, but I understand your reason for wanting to keep things simple and even with my misgivings about the table I concede that it is a far better estimation than provided by a lot of other methods.

    Interestingly, from reading everything I can get my hands on that Buffett has actually written, I don’t believe he uses a simple formula for the retained portion of his intrinsic values. I suspect he treats the dividend stream at purchase as a bond (i.e. as per your table 11.1, ROE/RR*equity) and then does a discount cash flow on the retained earnings component. He probably estimates the duration and sustainability of the annuity better than most.

    Being a bit of a numbers nerd I was infatuated with annuity and IRR calculations when I first came across them. This was pre spreadsheets. I can’t help think that Buffett as a numbers man also has a soft spot for these calculations, thing is he can probably do them in his head – luckily for me they are now simple in Excel. Curious to know if you think Simmons formula is actually used by Buffett or is it solely his work? Still trying to decide whether to buy the Simmons book and scratch my curiosity – It’s not available in Australia and It doesn’t get very good reviews, would you recommend it?

    • Hi Gavin,

      No it doesn’t get good reviews, but like any good investor I don’t listen to what other people think. Remember Graham’s comment that you aren’t right or wrong because others agree with you. Also keep in mind Munger’s quip when asked why he was such a good investor; “My guesses are better than yours”. For the small price of Simmon’s book – go for it. I am glad I bought it.

      • Hi Roger

        I am curious to read Richard Simmons’ insights. It seems finding his book is rather difficult. Could you please point me in the direction that I can purchase and order the “Richard Simmons” book?


  57. Roger,
    I would like to thank you for the book which arrived right on my birthday, only a true investor can appreciate your book.
    I have been watching you and other brokers on sky news on a regular basis and I have got rating for all brokers on scale from A1 to C5 and I must say you are A1 broker.
    Looking forward to hear from you on TV and your blog.

    Kind Regards,

    • Thank you Boris. I shoudl point out that I am not a broker. I have several friends who are my brokers but I am not one myself. I was forced to answer the question tonight; “What do you do?” All I could say was “I manage money”. Good thing we aren’t defined by what we do.

  58. Hi Roger,

    Agree with Mike’s comment about not understanding the formula and being a “black box”, that was my initial concern as well. However, also understand that you cannot reveal everything, just as Coke cannot reveal their secret formula. For now, all we can do is base it on your past analysis and valuations of stocks, which thus far has been pretty good, even if they mean making the ASX seem like a boring place to invest (e.g. not many companies undervalued so we cant really buy anything)

    Further, I believe even if Roger or Warren Buffett for that matter revealed their secret formula it would not really make such a big difference. Estimating the value is one thing, but also the business acumen and analysis part which is a lot more subjective plays an enormous factor. Nonetheless, I guess we will always be curious of that formula.

    • Hi Frank, Its not that hard to work out. Several people already have. They will act like they invented it when they reverse engineer it, but of course without the book, they hadn’t. Beware of cheap imitations indeed! Keep in mind that as I say in the book, the formula I use day-to-day is different again because the major flaw in the model presented is its straight line orientation. I am not a fan of straight lines. In reality, even if you solve the formula in the book, it is not the ONLY one I use although it is fundamentally the best of everything else I have constructed. As I have mentioned previously I create a valuation range rather than a single ‘precise’ number.

      • Frank

        The secret formula for Coke is 7X

        Won a keg of beer at a trivia night with that little pearl ;-)

      • Hi Roger,

        I’ve just finished your book and found it illuminating. I am puzzled by your comment above….

        “In reality, even if you solve the formula in the book, it is not the one I use although it is fundamentally the best of everything else I have constructed….”

        What does this mean for your steps on pages p188-190 (for example)- have you deliberately left out the ‘final step’ that helps you avoid those straight lines because you feel it is giving too much away? Is that final step your collected distillation of the analyst’s reports you refer to?


      • Hi Roger,

        I was amongst the first to line up and buy your book and I am very excited to have it. Thank you. It’s forcing me to tackle methods, terminology, research etc. that I didn’t understand before. I feel I’m slowly getting my head around it. I’ve always been the kind of person who wants to understand the why and how of things rather than just being spoon fed and being told to take facts on faith. That means asking a lot of questions sometimes though. Most I try to research and answer myself but I can’t always do that. You’ve been generous with your time on this blog to answer people’s queries but I’m wondering if it might not be a good idea to set up a forum. That way people who have bought your book can help each other. I’m sure a FAQ section would save you some grief too :)

        Just an idea.

        Thanks again.


  59. Thank you thank you thank you
    To me you have just made your book complete.
    I had all the information I needed in front of me, I just couldn’t see for looking (hopefully my wife won’t read this).
    Now to re read your book.
    Thanks again

    • Hi Roger

      It seems you have adopted a few different RR’s for some of the businesses in the table (as opposed to a general 10% RR for example).

      Could you clarify a little further as to why? Has a higher RR has been used to account for a greater assumed risk re each specific business?

      Is there any chance you might rank those businesses in the table A1-C5 for us?


  60. Hi Roger,
    A caveat on analyst forecasts. They are almost always optimistic for several reasons, so use the consensus forecasts carefully, knowing that they are very likely to be high.

    With regard to your answer to question 3, without knowing how the tables have been calculated, what level of confidence do we have that they are correct? Given they are a crucial part of your intrinsic value calculation, I’d like to know what’s behind the tables. Personally I think that without knowing how the tables are calculated makes your method of calculating intrinsic value as much as use as “black box” share picking software.


    • I should point out Mike that no intrinsic value is “correct”. Intrinsic value is an estimate although I confess I would rather use my estimate than another. You will just have to give them some time and see how useful they are. Although I suspect you might be satisfied with the track record to date. You don’t know the ingredients in a can of coke but you ingest that stuff! It has proven itself as being both tasty and harmless. I am satisfied the valuations produced are robust and as you know I use them myself.

  61. Roger

    Please ignore my previous comment. Your “source” link has answered my questions.


    David C

  62. Roger
    Thanks again for your book and the above examples. I have tried to prepare a few valuations and the method, as you promised is, simple. I have found that uncertainty arises when I try to source the inputs from broker reports. I’m not sure I am picking up the right inputs. What I, and perhaps others, would find very useful is a couple of worked examples from broker reports i.e the financial spreads where the actual inputs are marked. That would confirm that I am picking up the right inputs. Even a worked example using extracts from financial statements would help. I have used the broker forecasts to predict future IV. Is this a reasonable approach?

    David C

    • Thats not a bad idea David. There are a few in the book, but I can see that some actual printed research notes would help. Perhaps that could be part of a workshop and I could ask a few of the guys on my broking panel to supply the research.

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