edinetdb / dcf-valuation

DCF Valuation Skill (Japanese Market)

Workflow Checklist

Copy and track progress:

DCF Analysis Progress:
- [ ] Step 1: Gather financial data
- [ ] Step 2: Calculate FCF growth rate
- [ ] Step 3: Estimate discount rate (WACC)
- [ ] Step 4: Project future cash flows (Years 1-5 + Terminal)
- [ ] Step 5: Calculate present value and fair value per share
- [ ] Step 6: Run sensitivity analysis
- [ ] Step 7: Validate results
- [ ] Step 8: Present results with caveats

Step 1: Gather Financial Data

Call the get_financials tool with these queries:

1.1 Cash Flow History

Query: "[TICKER] annual financial statements for the last 5 years"

Extract: cfOperating (operating cash flow), cfInvesting, capex, calculate FCF = cfOperating - capex (absolute value)

1.2 Financial Metrics / Key Ratios

Query: "[TICKER] key ratios and financial metrics"

Extract: ROIC, financialLeverage, deRatio, operatingMargin, netMargin, dividendYield

1.3 Balance Sheet

Query: "[TICKER] latest financial statements"

Extract: totalAssets, netAssets, interestBearingDebt (or calculate from shortTermLoans + longTermLoans + bondsPayable), cash, sharesIssued

1.4 Company Info

Query: "[TICKER] company info"

Extract: industry, accountingStandard, healthScore, PER, BPS, EPS

1.5 Current Price

EDINET DB does not provide stock price data. Use the latest PER × EPS as a price estimate, or note that the user should provide the current stock price for accurate analysis.

Step 2: Calculate FCF Growth Rate

Calculate 3-5 year FCF CAGR from cash flow history.

Cross-validate with: revenue growth trend, EPS growth, operating income growth

Growth rate selection:

• Stable FCF history → Use CAGR with 10-20% haircut
• Volatile FCF → Weight recent trends more heavily
• Cap at 15% (sustained higher growth is rare)

Step 3: Estimate Discount Rate (WACC)

Default assumptions for Japanese market:

• Risk-free rate: 1.0-1.5% (JGB 10-year yield)
• Equity risk premium: 5-7%
• Cost of debt: 1-3% pre-tax (Japan's low interest rate environment)
• Tax rate: ~30% (effective corporate tax)

Calculate WACC using deRatio for capital structure weights.

Typical WACC ranges for Japanese companies:

• Large-cap blue chips: 5-7%
• Mid-cap growth: 7-9%
• Small-cap / high-risk: 9-12%

Reasonableness check: WACC should be below ROIC for value-creating companies.

Step 4: Project Future Cash Flows

Years 1-5: Apply growth rate with 5% annual decay (multiply growth rate by 0.95, 0.90, 0.85, 0.80 for years 2-5).

Terminal value: Use Gordon Growth Model with 1.0-1.5% terminal growth (Japan's lower nominal GDP growth).

Step 5: Calculate Present Value

Discount all FCFs → sum for Enterprise Value → subtract Net Debt → divide by sharesIssued for fair value per share.

Note: All amounts are in millions of JPY unless stated otherwise. Fair value per share will be in JPY.

Step 6: Sensitivity Analysis

Create 3×3 matrix: WACC (base ±1%) vs terminal growth (0.5%, 1.0%, 1.5%).

Step 7: Validate Results

Before presenting, verify these sanity checks:

1. PER cross-check: Implied PER (fair value / EPS) should be reasonable for the industry

   • Japanese market average: ~15x. Growth: 20-30x. Value: 8-12x.

2. PBR cross-check: Fair value / BPS should be reasonable

   • TSE has been pushing companies to achieve PBR > 1.0x
3. Terminal value ratio: Terminal value should be 50-80% of total EV for mature companies

If validation fails, reconsider assumptions before presenting results.

Step 8: Output Format

Present a structured summary including:

1. Valuation Summary: Current price (if known) vs. fair value, upside/downside percentage
2. Key Inputs Table: All assumptions with their sources
3. Projected FCF Table: 5-year projections with present values (in millions of JPY)
4. Sensitivity Matrix: 3×3 grid varying WACC (±1%) and terminal growth (0.5%, 1.0%, 1.5%)
5. Caveats: Standard DCF limitations plus Japan-specific considerations (yen currency risk, governance reform impact, cross-shareholding)