How to Use This Calculator:
The Rule One Margin of Safety Calculator helps you use Future Growth Rate (FGR) and Earnings Per Share (EPS) to determine the Sticker Price (or fair value) of a company. It then calculates the Margin of Safety (MOS) price - the price at which a Rule #1 investor could safely buy the company in order to make a 15% return over a period of 10 years. This MOS is half of the Sticker Price and is sometimes referred to as "buying a $10 bill for just $5.”
Margin of Safety:
|Current EPS||Est. EPS Growth Rate||Future P/E||Sticker Price||Margin of Safety|
When entering the Estimated EPS Growth Rate, remember to choose the lower of either the historical Growth Rate or the Analysts’ Earnings Estimate, but never over 15%.
This will be the rate at which you will grow the Current EPS into the future. See Chapter 9 of Rule #1 for a refresher on choosing a historical growth rate.
The Importance of Margin of Safety for Investors
What is the Margin of Safety?
The Margin of Safety is the discount rate you can buy a wonderful business at as a Rule One investor, which is generally 50% off the Sticker Price, or fair value of the company’s share price.
Because the Margin of Safety is just 50% of the Sticker Price, it allows you the ability to purchase into the business with lower risk. Setting this limitation on the price of a business before you buy it helps protect you by providing an extra 50% cushion off the value of the company.
Since RULERS do a lot of research into businesses before buying into them, it should always be something you’re confident in purchasing. However, anything can happen with the stock market, and it makes sense to allot yourself an extra measure of protection. Buying at 50% off does just that.
The Margin of Safety Formula
To find the Margin of Safety, you first need to find the Sticker Price of a business and its stock. In order to evaluate the Sticker Price you want to find the Future Growth Rate, the P/E Ratio, and your Minimum Acceptable Rate of Return. The Future Growth Rate is always an estimate, the other numbers you can find on financial statements and plug them into the calculator above to see the value, or Sticker Price, of the company's stock. Next, you simply cut that price in half (or take 50%) and that is your Margin of Safety price.
For example, if you wanted to buy into a business that was worth $80 per share (Sticker Price), you would look for a Margin of Safety of $40. If the company cannot be bought at $40 then you should add it to your watchlist, update your calculations periodically as new information becomes available, and exercise patience.
If these numbers are in line with Rule #1 requirements, move onto the ROIC to finish determining if this business is right for you.
This calculator determines ROIC; the most important number to tell you if a business is being run well.Calculate ROIC