Category: 3. Business

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.0%. We discount the terminal cash flows to today’s value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = UK£3.9m× (1 + 3.0%) ÷ (13%– 3.0%) = UK£40m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£40m÷ ( 1 + 13%)¹⁰= UK£11m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£32m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of UK£0.3, the company appears about fair value at a 7.7% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at iomart Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 13%, which is based on a levered beta of 2.000. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Check out our latest analysis for iomart Group

Strength

Weakness

Opportunity

Threat

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you’d apply different cases and assumptions and see how they would impact the company’s valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For iomart Group, we’ve put together three pertinent items you should assess:

1. Risks: Every company has them, and we’ve spotted 3 warning signs for iomart Group (of which 1 can’t be ignored!) you should know about.

2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for IOM’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the AIM every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

However, what counts as a “fair” PE ratio is not set in stone. Higher growth expectations typically justify a higher PE, since investors are willing to pay a premium for future earnings potential. On the other hand, businesses facing greater risks or lower expected growth rates tend to have lower PE multiples, reflecting more cautious sentiment.

At present, Constellation Brands is trading at a PE ratio of 19x. This places it close to both its peer average of 19.2x and a bit above the broader beverage industry average of 17.7x. Simply Wall St’s proprietary “Fair Ratio” for Constellation Brands is calculated at 20.8x, taking into account not just industry benchmarks, but also the company’s unique growth opportunities, profit margin, market cap, and risk profile.

Unlike simple industry or peer comparisons, the Fair Ratio provides a more holistic assessment by weighing business-specific factors alongside sector trends. This means it can identify under- or overvaluation more precisely, especially for companies that do not fit neatly into generic industry categories.

Comparing Constellation Brands’ current PE of 19x to its Fair Ratio of 20.8x suggests the stock may still be undervalued on this basis.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1430 companies where insiders are betting big on explosive growth.

Earlier, we mentioned there is an even better way to understand valuation, so let’s introduce you to Narratives. Put simply, a Narrative is your personal story about a company. It is how you connect the dots between business drivers, key financial assumptions (like future revenue or margins), and what you believe the company’s fair value should be.

Unlike traditional analyses that focus only on numbers, Narratives bring context and meaning by linking a company’s story to specific financial forecasts and valuation targets. On Simply Wall St’s Community page, you can access and build Narratives with ease, joining millions of investors who use this tool to make more informed buy or sell decisions by directly comparing their assumed fair value with the latest market price.

The real power of Narratives is their dynamic nature. They update automatically as new data, news, or earnings come in, helping you stay relevant and responsive in your investment thinking. For example, two investors might both follow Constellation Brands: one expects earnings to sharply recover as distribution initiatives gain traction and sets their fair value as high as $247, while another, concerned about persistent demand weakness, believes fair value is as low as $123. Narratives let you see and compare all these perspectives, so you can decide which story and assumptions you agree with.

Do you think there’s more to the story for Constellation Brands? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include STZ.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Interpreting a PE ratio requires consideration of growth expectations and company risk. Rapid growth or lower perceived risk often justifies a higher multiple, while slower growth or elevated risk typically commands a lower one. Therefore, understanding what constitutes a “normal” or “fair” PE for a specific business depends on these dynamics as well as broader market trends.

NRG Energy currently trades at a PE ratio of 22.2x. This compares to an industry average PE of 20.6x for Electric Utilities and a peer average of 19.0x. However, these benchmarks do not account for NRG’s unique growth profile, profit margins, or risk factors. That’s where the Simply Wall St “Fair Ratio” comes in. It estimates a fair PE for NRG at 39.8x based on a comprehensive evaluation of factors including its growth outlook, profitability, industry context, and market cap. This approach leads to a more accurate benchmark, as it integrates company-specific fundamentals rather than leaning solely on broad averages.

With the current PE ratio of 22.2x below the fair ratio of 39.8x, this analysis suggests that NRG Energy could be undervalued relative to its long-term prospects.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1430 companies where insiders are betting big on explosive growth.

Earlier, we mentioned there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is simply your story—your perspective about a company’s future—expressed in financial terms like expected revenue, earnings, profit margins and, ultimately, a fair value. Narratives link what you believe about a business, such as NRG Energy’s earnings growth from new data center agreements or its evolving risk profile, to an explicit financial forecast and a fair value estimate. This bridges the gap between “the story” and “the numbers.”

They are accessible and easy to use, and available on Simply Wall St’s platform within the Community page, where millions of investors share, compare and discuss their views. Narratives make decisions clearer by continuously showing you how your fair value stacks up against the current market price, helping you decide when to buy, hold or sell. They also update dynamically when new information arrives, so your investment view stays in tune with the latest news or company results. For instance, some NRG Energy investors are bullish, forecasting $1.9 billion in 2028 earnings and targeting a $203 share price, while others are more cautious, expecting just $1.4 billion and setting their fair value at $92. Narratives let you back your conviction with numbers and see exactly how and why your perspective may differ from the crowd.

Do you think there’s more to the story for NRG Energy? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include NRG.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com