(someone else's) Valuation: Rolls Royce

Breaking down the Simply Wall Street Discounted Cash Flow Model

I recently had a discussion recently with someone who felt my Rolls Royce valuation was too conservative and would have cost anyone who agreed with me a considerable amount of money. Recent history has shown that individual to be correct, in that the price has risen considerably above my estimate of intrinsic value, but it’s always easy to be right with hindsight. But was my valuation unreasonably low? Or is the current price based more on sentiment than fundamentals?

I thought this discussion actually gave me the opportunity to break down and compare my own approach with an alternative, far more optimistic, valuation. For this purpose, I will use Simply Wall Street’s valuation, currently suggesting Fair Value for Rolls Royce (RR.L) is £9.84. This is between 3 and 4 times higher than I currently expect.

Source: Simply Wall St

What Information is used for a Fair Value assessment?

Both I and Simply Wall St use a Discounted Cash Flow approach to judge fair value.

This approach requires:

• a risk…