Calculating The Intrinsic Value Of The Colonial Motor Company Limited (NZSE:CMO)

The Colonial Motor Company Limited (NZSE:CMO) is a specialty retailer listed on the New Zealand Stock Exchange, with a market capitalization of NZD 212.52 million. To determine if CMO is overvalued or undervalued, we need to calculate its intrinsic value using key financial metrics and valuation ratios. This article will guide you through the process of calculating the intrinsic value of CMO.



Step 1: Calculate the Enterprise Value (EV)

The first step in calculating the intrinsic value of CMO is to determine its enterprise value (EV). EV is calculated as the sum of the market capitalization and the net debt of the company. For CMO, the EV is:

EV = Market Capitalization + Net Debt
EV = NZD 212.52 million + NZD 234.77 million
EV = NZD 440.93 million

Step 2: Calculate the EV/EBITDA Ratio

Next, we'll calculate the EV/EBITDA ratio, which compares the enterprise value of the company to its earnings before interest, taxes, depreciation, and amortization (EBITDA). This ratio helps us understand the company's valuation relative to its earnings power. For CMO, the EV/EBITDA ratio is:

EV/EBITDA = EV / EBITDA
EV/EBITDA = NZD 440.93 million / NZD 50.78 million
EV/EBITDA = 8.70

Step 3: Calculate the P/E Ratio

The price-to-earnings (P/E) ratio is a widely used valuation metric that compares the company's stock price to its earnings per share (EPS). A high P/E ratio indicates that the stock is relatively expensive, while a low P/E ratio suggests that the stock is undervalued. For CMO, the P/E ratio is:

P/E = Stock Price / EPS
P/E = NZD 6.5 / NZD 0.14
P/E = 46.86

Step 4: Calculate the P/B Ratio

The price-to-book (P/B) ratio is another important valuation metric that compares the company's stock price to its book value per share. A low P/B ratio indicates that the stock is undervalued, while a high P/B ratio suggests that the stock is overvalued. For CMO, the P/B ratio is:

P/B = Stock Price / Book Value per Share
P/B = NZD 6.5 / NZD 9.07
P/B = 0.72

Step 5: Calculate the Intrinsic Value

To calculate the intrinsic value of CMO, we'll use the Gordon Growth Model, which takes into account the company's expected future growth rate and the discount rate. The formula for the Gordon Growth Model is:

Intrinsic Value = (EPS * (1 + Growth Rate)) / (Discount Rate - Growth Rate)

Assuming a growth rate of 5% and a discount rate of 10%, the intrinsic value of CMO is:

Intrinsic Value = (NZD 0.14 * (1 + 0.05)) / (0.10 - 0.05)
Intrinsic Value = NZD 3.50

Based on the calculations above, the intrinsic value of CMO is NZD 3.50, which is significantly lower than its current stock price of NZD 6.5. This suggests that CMO may be overvalued at its current price.



In conclusion, calculating the intrinsic value of CMO involves determining its enterprise value, calculating key valuation ratios, and applying the Gordon Growth Model. Based on the calculations, CMO appears to be overvalued at its current stock price. However, it's essential to consider other factors, such as the company's competitive position, market trends, and potential risks, when making investment decisions. Always consult with a financial advisor before making any investment decisions.