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Margin of safety calculation

I was interested in how gurufocus value investors calculate the margin of safety intrinsic value of a stock.

Currently I use a simple formula:

Equity per share (adjusted for intangible assets, inventory) + past 3 yr avg EPS * 10.

Screening criteria:

Total equity > total liabilities

ROE > 20%

Free Cash Flow yr1 + yr2 + yr3 >= 0

P/E < 15

Please chime in and share your thoughts

Rating: 2.8/5 (5 votes)


Billytickets - 8 years ago
My book Consume Consume and Consume More has my formula with a built in margin of safety that tells you when to buy .
Roke6362 - 8 years ago
Equity/share is 61266/2897=21.15 / EPS AVG. past 3 years=3.34*2897=9676*10=96760



Your IV formula does not consider historical PE values. It also does not consider the reproduction value to cash flow of their R & D. Compare FCF and normalized earnings and come up with an earnings figure. Divide that number by the (WACC-Terminal Growth Factor). Only use TGF if the business has real franchise value. Then add excess cash. Divide by the #shares outstanding. Then choose a margin of safety that fits your appetite for risk (25%-50%).

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