Investors can calculate the intrinsic value of a company by substituting a fixed discount rate and a fixed growth rate using the cash flow discount method, which is one of the corporate value analysis methods, and compare it with the current market cap.
However, the discount rate is highly influenced by management's ability, so accurate measurement is not possible, and there is no fixed discount rate. Also, no company always grows at the same rate. This is an approximate value and can be used as a reference, but not completely reliable. It is sufficient for bonds with fixed interest. There is no model that can accurately measure corporate value.
However, if the business structure of a company is relatively simple and generating stable cash flows, it is not accurate, but reliable values can be derived. At this time, the discount rate should be slightly higher than inflation and the growth rate of a company should be based on the GDP growth rate of the country of the company. If you set it this way, there is less chance that the corporate value will be overvalued. If your company's future cash flows are predictable to some extent over the next 10 years, you can compare the discounted current corporate value to the market cap and buy when the value is high enough. At this point, the significant difference between price and value becomes the margin of safety.
Investing in companies with this margin of safety is an investment principle that Warren Buffett learned from his mentor Benjamin Graham. If you continue to invest in the company's value more accurately and secure a safety margin, you will be the second Warren Buffet.
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