Are NextEd Group Limited (ASX:NXD) Investors Paying Above The Intrinsic Value?

Simply Wall St.

Feb 12

AdvertisementKey Insights NextEd Group's estimated fair value is AU$0.18 based on 2 Stage Free Cash Flow to Equity Current share price of AU$0.23 suggests NextEd Group is potentially 23% overvalued ...

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Using the most recent financial data, we'll take a look at whether the stock is fairly priced  by taking the expected future cash flows and discounting them to today's value.  This will be done using the Discounted Cash Flow (DCF) model.  Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.  Remember though, that there are many ways to estimate a company's value, and a DCF is just one method.  Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Trump has pledged to \"unleash\" American oil and gas and these 15 US stocks have developments that are poised to benefit. Step By Step Through The Calculation   We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase.  To start off with, we need to estimate the next ten years of cash flows.   Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.   Generally we assume that a dollar today is more valuable than a dollar in the future,  and so the sum of these future cash flows is then discounted to today's value:  10-year free cash flow (FCF) forecast  2026202720282029203020312032203320342035 Levered FCF (A$, Millions) -AU$6.40mAU$500.0kAU$2.80mAU$2.77mAU$2.78mAU$2.81mAU$2.86mAU$2.93mAU$3.01mAU$3.10mGrowth Rate Estimate SourceAnalyst x1Analyst x1Analyst x1Est @ -1.10%Est @ 0.27%Est @ 1.23%Est @ 1.90%Est @ 2.37%Est @ 2.70%Est @ 2.93% Present Value (A$, Millions) Discounted @ 8.1% -AU$5.9AU$0.4AU$2.2AU$2.0AU$1.9AU$1.8AU$1.7AU$1.6AU$1.5AU$1.4(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$8.6m We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period.  The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.5%. We discount the terminal cash flows to today's value at a cost of equity of 8.1%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$3.1m× (1 + 3.5%) ÷ (8.1%– 3.5%) = AU$70mPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$70m÷ ( 1 + 8.1%)10= AU$32m The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value,  which in this case is AU$41m.  In the final step we divide the equity value by the number of shares outstanding.  Compared to the current share price of AU$0.2, the company appears   slightly overvalued    at the time of writing.   Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. ASX:NXD Discounted Cash Flow February 11th 2026  The Assumptions  Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows.  You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them.  The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance.  Given that we are looking at NextEd Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt.  In this calculation we've used 8.1%, which is based on a levered beta of 1.084. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.   See our latest analysis for NextEd Group  Looking Ahead:  Whilst important, the DCF calculation  is only one of many factors that you need to assess for a company.  DCF models are not the be-all and end-all of investment valuation.  Rather it should be seen as a guide to \"what assumptions need to be true for this stock to be under/overvalued?\"  If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different.   Can we work out why the company is trading at a premium to intrinsic value?   For NextEd Group, we've compiled three  further  aspects  you should further examine:   Risks: To that end, you should be aware of the   1 warning sign  we've spotted with NextEd Group .  Future Earnings: How does NXD's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!   PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.Valuation is complex, but we're here to simplify it.Discover if NextEd Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"}}}