A look at the intrinsic value of Deswell Industries, Inc. (NASDAQ:DSWL)

Today we’ll go over one way to estimate the intrinsic value of Deswell Industries, Inc. (NASDAQ:DSWL) by taking the expected future cash flows and discounting them to their present value. One way to do this is by applying the discounted cash flow (DCF) model. This may sound complicated, but it’s actually quite simple!

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. If you want to learn more about intrinsic value, you should check out Simply Wall St’s analysis model.

Check out our latest analysis for Deswell Industries

The method

We need to calculate Deswell Industries’ value a little differently than other stocks because it’s an electronics company. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and often goes unreported by analysts. This often underestimates a stock’s value, but it can still be a good comparison to competitors. We use the Gordon Growth Model, which assumes the dividend will grow at a sustainable rate over time. For a number of reasons, a very conservative growth rate is used, which cannot exceed that of a company’s gross domestic product (GDP). In this case, we used the 5-year average 10-year Treasury bond yield (2.0%). The expected dividend per share is then discounted to today’s value using a cost of equity of 9.0%. Compared to the current share price of $3.2, the company appears to be about fair value at the time of writing. However, ratings are imprecise instruments, much like a telescope – move a few degrees and you end up in a different galaxy. Keep that in mind.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= $0.2 / (9.0% – 2.0%)

= 2.9 US dollars

Important assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Deswell Industries 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 takes debt into account. In this calculation, we used 9.0%, which is based on a leveraged beta of 1.257. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Deswell Industries

Strength

weakness

Opportunity

Danger

Next Steps:

Valuation is only one side of the coin when developing your investment thesis and should not be the only metric you consider when researching a company. It is not possible to get a foolproof valuation using a DCF model. A better way would be to apply different cases and assumptions and see how they would affect the company’s valuation. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. For Deswell Industries, we have compiled three important elements that you should examine in more detail:

1. Risks: For example, we found 4 warning signs for Deswell Industries (1 cannot be ignored) you should know.

2. management:Have insiders increased their shares to capitalize on market sentiment regarding DSWL’s future prospects? Read our management and board analysis with insights into CEO compensation and governance factors.

3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

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

Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment based solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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