dcf-valuation

name	dcf-valuation
description	Performs discounted cash flow (DCF) valuation analysis to estimate intrinsic value per share for Japanese listed companies. Triggers when user asks for fair value, intrinsic value, DCF, valuation, "what is X worth", price target, undervalued/overvalued analysis, or wants to compare current price to fundamental value.

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)