Big Lots Stock Analysis

The intrinsic value ofa company is how much cash it can generate over its lifespan. If a businesslasts for ten years and produces a million dollars of free cash profit everyyear, its intrinsic value is ten million dollars.

The present value of aninvestment is the price you must pay right now to earn that intrinsic value inhowever many years you want to wait. This of course depends on the rate ofreturn you want for your investment.

You can't predict what a company will make in the future with perfectaccuracy, but a company with a history of increasing its free cash flow everyyear is likely to do so over time. By projecting free cash flow into thefuture, you can calculate a fair price for the stock right now.

While most stocks are priced fairly, sometimes they go on sale. Thiscalculation will help you decide that. You still have to figure out if it's agood investment, but bargains exist.

The safety margin of astock helps you avoid risk.

Why? Because the discounted free cash flow analysis relies on estimates,discounting the fair price by a further safety margin gives you some wiggleroom to be wrong about those estimates. Established companies with stable freecash flow growth need a small safety margin. Smaller and newer and riskiercompanies need a larger safety margin. A company with a lot of debt needs alarger safety margin and a company with a lot of equity needs less.

By investing in multiple companies and keeping a sensible safety margin, youcan be pleasantly surprised by great companies outperforming your expectationsand minimize the possibility of stagnation (or even loss) by companies whichunderperform.

The PE ratio measures thereported earnings of a company to its current stock price. While earnings areeasy to manipulate on the balance sheet, this ratio gives you a sense of whatbuyers are willing to pay for the stock—what they believe it will do inthe future.

Comparing a stock's PE to the average PE of companies in its industry givesyou a sense of market sentiment about the stock and how well it faresfinancially. It's not the only number, nor the most important, but comparingsimilar companies is valuable. A ratio far above or below that of its peers issignificant.

Industries are more specific than sectors, so companies within mostindustries are more similar than are companies within an industry. Be awarethat the size and customers of companies are important to their prospects.

The PE ratio measures thereported earnings of a company to its current stock price. While earnings areeasy to manipulate on the balance sheet, this ratio gives you a sense of whatbuyers are willing to pay for the stock—what they believe it will do inthe future.

Comparing a stock's PE to the average PE of companies in its sector givesyou a sense of market sentiment about the stock and how well it faresfinancially. It's not the only number, nor the most important, but comparingsimilar companies is valuable. A ratio far above or below that of its peers issignificant.

Be aware that sectors are very broad, with many types of companies in thesame sector.

The cash yield of a stock isthe ratio of free cash per share—real dollars available after bringing inrevenue and paying bills—to the current price of the stock. It's similarto the PE ratio, but it's less prone to manipulation through accountingpractices.

In general, the less you have to pay to make more money, the better.

The free cash flowjitter of a stock measures how much the company's free cash flow variesfrom its historical trend, on average. While it's always nice to make moremoney than you expected, a company with predictable free cash flow is stableand good. A company with wild swings in its free cash flow warrants furtherresearch.

In general, the lower this number, the better.

The dividend yield of astock is the amount of money paid out in dividends every year divided by thestock's current price. While not every stock pays a dividend, many solidcompanies pay good dividends. In general, the higher this calculation, thebetter—think of it like an interest rate of an investment—if thecompany pays dividends consistently.

A high dividend payout rate may indicate that the share price has fallenrecently. Be sure that the company is worth investing in before you chase highdividend yields!