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Value score

The Value Score is a measure designed to help investors determine how undervalued a company is compared to its intrinsic value. Intrinsic value is an estimate of the true worth of a company, based on an analysis of its fundamentals, including cash flows, growth prospects, and risk factors. Essentially, the Value Score helps investors identify stocks that are trading below their intrinsic value, indicating a potentially good investment opportunity.

How is the Value Score calculated?

stocktrader.studio calculates the Value Score using a discounted cash flow (DCF) model. This model projects a company’s future cash flows and then discounts them back to their present value using a discount rate that reflects the risk of those cash flows. The parameters for this calculation, such as the discount rate and growth rates, are chosen by Charlie, our integrated AI assistant. Charlie tailors these parameters on a case-by-case basis, taking into account the company’s industry, historical performance, and future growth prospects.

The formula for Value Score

The Value Score is derived through the following steps:

  1. Calculate the Intrinsic Value: Using the DCF model with parameters set by Charlie.
  2. Compare to Market Price: We use the Enterprise Value as a reference, rather than the Market Cap. This is because the Enterprise Value is already adjusted for Net Debt, and taking debt into account gives a more accurate picture of the company’s value.
  3. Determine the Discount: Calculate the discount, which is the difference between the intrinsic value and the market price.
  4. Rank the Discount: Companies that are undervalued are assigned a value score greater than 50, while those that are overvalued are assigned a score less than 50.

Why the Value Score matters

The Value Score is a powerful tool for investors looking to identify undervalued stocks. By focusing on companies with high Value Scores, investors can target stocks that are trading at a significant discount to their intrinsic value, potentially offering higher returns when the market corrects this undervaluation.