What is Required Business Performance®?
Required Business Performance®, or RBP®, is the revenue growth necessary to support the current stock price. Transparent Value uses its RBP® Methodology to determine each company's Required Business Performance® based on information disclosed in the company's publicly available financial reports.
RBP® Probability is the probability management will deliver the Required Business Performance® to support the stock price is called RBP® Probability. The RBP® Probability, provides an objective, disciplined, rules-based way of measuring the probability that management will deliver the Required Business Performance®.
Calculating RBP® - A Fact-Driven Approach
At Transparent Value, we reverse the traditional discounted free cash flow method by starting with the value of a stock as determined by the market. Our methodology is a reverse discounted free cash flow analysis utilizing a company's current stock price, its income statement, balance sheet and cash flow statements to determine what the current price of its stock implies about future free cash flow (FCF), revenue growth and RBP®. This process is fact driven.
How we calculate RBP® Probability
To determine the RBP® Probability for a given company, we first determine the revenue growth required to support the current stock price. We do this using a reverse discounted cash flow model that uses the stock price as the input and then, assuming a ten-year first stage and perpetuity thereafter, solves for the required free cash flow and revenue growth rates.
Then, the company's historical revenue growth rate is fit to a distribution curve using data from the prior twelve quarters. With this curve and the company's required revenue growth rate, we can calculate the probability that management will deliver the required revenue growth.
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