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Maximum price to pay

The question isn't whether a company is good, but how much to pay for it. Estimate what it will earn a few years out, the multiple it might trade at then, and discount the return you require: that gives you today's maximum price.

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Your numbers

What you measure (earnings or free cash flow)

How much you think that per-share figure will grow each year over the period. Better to aim low than high.

The P/E or EV/FCF it might trade at the end of the period. Pick a sensible one for the business, not its best year.

What you want to earn if everything goes as planned. At 15% you leave room for being wrong.

Optional. To see the yearly return implied by paying that price.

Assumptions and how it's calculated

The logic. It's the way we think about price at Slow Compound Club, written in general terms. A share is worth what the company will earn per share and what the market is willing to pay for those earnings. So you estimate the per-share figure a few years out (earnings or free cash flow), multiply it by a sensible exit multiple and get a target price. Then you bring that price back to today with the return you require: if you pay that or less and the assumptions hold, you get at least that return every year.

P/E or EV/FCF. P/E looks at earnings per share. EV/FCF looks at free cash flow and the value of the whole company, debt included: that's why, when going back to a per-share price, net debt per share is subtracted (or net cash added, if it's negative).

Per-share figure in n years = Figure today × (1 + g)^n Target price (P/E) = EPS in n years × exit P/E Target price (EV/FCF) = FCF per share in n years × exit multiple − net debt per share Maximum price today = Target price ÷ (1 + required return)^n Return at today's price = (Target price ÷ Today's price)^(1/n) − 1 g: expected yearly growth · n: period in years

What it leaves out. Dividends and buybacks during the period (which would improve the return), changes in the share count, and the odds that the assumptions turn out wrong. Everything hangs on three numbers: growth, multiple and required return. That's why the sensitivity table matters as much as the result.

If a term doesn't ring a bell, it's in the glossary.

This is an exercise based on your assumptions, not a recommendation.

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Invitation only, for now

We’re a small group and we like growing slowly, so accounts can’t be created right now: membership is by invitation. If you’d like to join, drop us a line and we’ll tell you more.