Calculate the Margin of Safety for Smarter Stock Purchases
Future EPS:
1.93
Future Value:
96.5
Sticker Price:
25.54
Margin of Safety:
29.5%
The Margin of Safety calculator is a valuable tool for investors to ensure they buy stocks at a significant discount to their intrinsic value. This cushion allows for a buffer in case of errors in valuation or market volatility, ultimately minimizing potential losses.
The calculator estimates the future EPS (Earnings Per Share) and stock value by considering factors such as future growth rate, future PE ratio, and minimum acceptable return. These inputs help calculate whether a stock is currently undervalued and if it meets the investor’s criteria for a margin of safety.
The sticker price is the estimated future value of a stock discounted to the present day, based on the minimum acceptable rate of return. In other words, it's the price you should be willing to pay for the stock today to achieve your desired return.
The formula used to calculate the sticker price is:
Sticker Price = Future Value / (1 + Minimum Acceptable Return) ^ Number of Years
For example, if Palantir’s future value is estimated to be $96.5, and the minimum acceptable return is 15%, the sticker price would be:
Sticker Price = $96.5 / (1 + 0.15) ^ 10 = $25.54
The margin of safety represents the discount between the current stock price and its intrinsic value (or sticker price). It reflects how much “room for error” an investor has if the stock underperforms. The higher the margin of safety, the more protected the investor is from risks.
Margin of Safety (%) = (Sticker Price - Current Stock Price) / Sticker Price * 100
If Palantir’s current stock price is $18, the margin of safety would be calculated as:
Margin of Safety = ($25.54 - $18) / $25.54 * 100 = 29.5%
Future EPS (Earnings Per Share) represents the company's expected earnings in the future, based on its historical growth rate. For Palantir, future EPS is important because it reflects the company’s potential for long-term growth.
The formula used to calculate future EPS is:
Future EPS = Current EPS * (1 + Growth Rate) ^ Number of Years
For example, if Palantir's current EPS is $0.14 and the growth rate is 30%, over 10 years the future EPS would be:
Future EPS = $0.14 * (1 + 0.30) ^ 10 = $1.93
Future value refers to the projected value of a stock in the future, assuming it grows at a certain rate. It is an essential factor in determining the stock’s sticker price and margin of safety.
Future Value = Future EPS * Future PE Ratio
For example, if Palantir's future EPS is $1.93 and the future PE ratio is 50, the future value would be:
Future Value = $1.93 * 50 = $96.5
Let’s walk through an example using Palantir's current metrics:
Using the formulas, we can calculate the following: