Intrinsic value of Companhia de Saneamento Basico do Estado - SBS

Previous Close

$10.75

  Intrinsic Value

$1.80

stock screener

  Rating & Target

str. sell

-83%

  Value-price divergence*

+215%

Previous close

$10.75

 
Intrinsic value

$1.80

 
Up/down potential

-83%

 
Rating

str. sell

 
Value-price divergence*

+215%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of SBS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 7.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  20.36
  17.60
  16.34
  15.21
  14.19
  13.27
  12.44
  11.70
  11.03
  10.42
  9.88
  9.39
  8.95
  8.56
  8.20
  7.88
  7.59
  7.33
  7.10
  6.89
  6.70
  6.53
  6.38
  6.24
  6.12
  6.01
  5.90
  5.81
  5.73
  5.66
  5.59
Revenue, $m
  3,277
  5,241
  6,098
  7,025
  8,022
  9,086
  10,216
  11,411
  12,669
  13,990
  15,372
  16,816
  18,322
  19,890
  21,522
  23,218
  24,981
  26,814
  28,718
  30,697
  32,754
  34,894
  37,120
  39,436
  41,848
  44,361
  46,981
  49,712
  52,562
  55,537
  58,643
Variable operating expenses, $m
 
  3,879
  4,512
  5,199
  5,936
  6,724
  7,560
  8,444
  9,375
  10,353
  11,376
  12,444
  13,558
  14,719
  15,926
  17,181
  18,486
  19,842
  21,251
  22,716
  24,238
  25,821
  27,468
  29,183
  30,968
  32,827
  34,766
  36,787
  38,896
  41,097
  43,396
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  3,373
  3,879
  4,512
  5,199
  5,936
  6,724
  7,560
  8,444
  9,375
  10,353
  11,376
  12,444
  13,558
  14,719
  15,926
  17,181
  18,486
  19,842
  21,251
  22,716
  24,238
  25,821
  27,468
  29,183
  30,968
  32,827
  34,766
  36,787
  38,896
  41,097
  43,396
Operating income, $m
  1,084
  1,363
  1,585
  1,827
  2,086
  2,362
  2,656
  2,967
  3,294
  3,637
  3,997
  4,372
  4,764
  5,171
  5,596
  6,037
  6,495
  6,972
  7,467
  7,981
  8,516
  9,072
  9,651
  10,253
  10,881
  11,534
  12,215
  12,925
  13,666
  14,440
  15,247
EBITDA, $m
  1,447
  1,790
  2,082
  2,399
  2,739
  3,102
  3,488
  3,896
  4,326
  4,777
  5,249
  5,742
  6,256
  6,791
  7,349
  7,928
  8,530
  9,155
  9,806
  10,481
  11,184
  11,914
  12,674
  13,465
  14,289
  15,147
  16,041
  16,974
  17,947
  18,963
  20,023
Interest expense (income), $m
  234
  200
  266
  338
  416
  500
  590
  685
  785
  891
  1,002
  1,118
  1,240
  1,367
  1,499
  1,636
  1,778
  1,927
  2,081
  2,241
  2,408
  2,581
  2,761
  2,948
  3,143
  3,346
  3,557
  3,777
  4,007
  4,247
  4,497
Earnings before tax, $m
  1,305
  1,163
  1,319
  1,488
  1,669
  1,862
  2,067
  2,282
  2,509
  2,746
  2,995
  3,254
  3,524
  3,805
  4,097
  4,401
  4,717
  5,045
  5,386
  5,740
  6,109
  6,492
  6,890
  7,306
  7,738
  8,188
  8,658
  9,148
  9,659
  10,193
  10,750
Tax expense, $m
  373
  314
  356
  402
  451
  503
  558
  616
  677
  742
  809
  879
  951
  1,027
  1,106
  1,188
  1,274
  1,362
  1,454
  1,550
  1,649
  1,753
  1,860
  1,973
  2,089
  2,211
  2,338
  2,470
  2,608
  2,752
  2,903
Net income, $m
  932
  849
  963
  1,086
  1,219
  1,359
  1,509
  1,666
  1,831
  2,005
  2,186
  2,375
  2,572
  2,778
  2,991
  3,213
  3,443
  3,683
  3,932
  4,190
  4,459
  4,739
  5,030
  5,333
  5,649
  5,977
  6,320
  6,678
  7,051
  7,441
  7,848

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  596
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  11,618
  12,974
  15,094
  17,389
  19,856
  22,490
  25,288
  28,245
  31,360
  34,629
  38,050
  41,625
  45,352
  49,233
  53,272
  57,471
  61,835
  66,371
  71,084
  75,983
  81,075
  86,371
  91,880
  97,614
  103,585
  109,805
  116,289
  123,050
  130,104
  137,467
  145,156
Adjusted assets (=assets-cash), $m
  11,022
  12,974
  15,094
  17,389
  19,856
  22,490
  25,288
  28,245
  31,360
  34,629
  38,050
  41,625
  45,352
  49,233
  53,272
  57,471
  61,835
  66,371
  71,084
  75,983
  81,075
  86,371
  91,880
  97,614
  103,585
  109,805
  116,289
  123,050
  130,104
  137,467
  145,156
Revenue / Adjusted assets
  0.297
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
Average production assets, $m
  9,546
  11,227
  13,062
  15,048
  17,182
  19,462
  21,883
  24,443
  27,138
  29,967
  32,928
  36,021
  39,246
  42,605
  46,100
  49,733
  53,510
  57,435
  61,514
  65,753
  70,160
  74,742
  79,510
  84,472
  89,639
  95,022
  100,633
  106,483
  112,588
  118,960
  125,614
Working capital, $m
  -151
  -414
  -482
  -555
  -634
  -718
  -807
  -901
  -1,001
  -1,105
  -1,214
  -1,328
  -1,447
  -1,571
  -1,700
  -1,834
  -1,974
  -2,118
  -2,269
  -2,425
  -2,588
  -2,757
  -2,932
  -3,115
  -3,306
  -3,505
  -3,711
  -3,927
  -4,152
  -4,387
  -4,633
Total debt, $m
  3,783
  4,513
  5,734
  7,056
  8,477
  9,994
  11,606
  13,309
  15,103
  16,986
  18,957
  21,016
  23,163
  25,398
  27,725
  30,143
  32,657
  35,270
  37,984
  40,806
  43,739
  46,790
  49,963
  53,266
  56,705
  60,288
  64,022
  67,917
  71,980
  76,221
  80,650
Total liabilities, $m
  6,743
  7,473
  8,694
  10,016
  11,437
  12,954
  14,566
  16,269
  18,063
  19,946
  21,917
  23,976
  26,123
  28,358
  30,685
  33,103
  35,617
  38,230
  40,944
  43,766
  46,699
  49,750
  52,923
  56,226
  59,665
  63,248
  66,982
  70,877
  74,940
  79,181
  83,610
Total equity, $m
  4,875
  5,501
  6,400
  7,373
  8,419
  9,536
  10,722
  11,976
  13,297
  14,683
  16,133
  17,649
  19,229
  20,875
  22,587
  24,368
  26,218
  28,141
  30,140
  32,217
  34,376
  36,621
  38,957
  41,388
  43,920
  46,557
  49,306
  52,173
  55,164
  58,286
  61,546
Total liabilities and equity, $m
  11,618
  12,974
  15,094
  17,389
  19,856
  22,490
  25,288
  28,245
  31,360
  34,629
  38,050
  41,625
  45,352
  49,233
  53,272
  57,471
  61,835
  66,371
  71,084
  75,983
  81,075
  86,371
  91,880
  97,614
  103,585
  109,805
  116,288
  123,050
  130,104
  137,467
  145,156
Debt-to-equity ratio
  0.776
  0.820
  0.900
  0.960
  1.010
  1.050
  1.080
  1.110
  1.140
  1.160
  1.180
  1.190
  1.200
  1.220
  1.230
  1.240
  1.250
  1.250
  1.260
  1.270
  1.270
  1.280
  1.280
  1.290
  1.290
  1.290
  1.300
  1.300
  1.300
  1.310
  1.310
Adjusted equity ratio
  0.388
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424
  0.424

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  932
  849
  963
  1,086
  1,219
  1,359
  1,509
  1,666
  1,831
  2,005
  2,186
  2,375
  2,572
  2,778
  2,991
  3,213
  3,443
  3,683
  3,932
  4,190
  4,459
  4,739
  5,030
  5,333
  5,649
  5,977
  6,320
  6,678
  7,051
  7,441
  7,848
Depreciation, amort., depletion, $m
  363
  427
  497
  572
  653
  740
  832
  929
  1,032
  1,139
  1,252
  1,370
  1,492
  1,620
  1,753
  1,891
  2,035
  2,184
  2,339
  2,500
  2,668
  2,842
  3,023
  3,212
  3,408
  3,613
  3,826
  4,049
  4,281
  4,523
  4,776
Funds from operations, $m
  393
  1,276
  1,460
  1,659
  1,872
  2,099
  2,341
  2,595
  2,863
  3,144
  3,438
  3,745
  4,065
  4,398
  4,744
  5,104
  5,478
  5,867
  6,271
  6,690
  7,127
  7,581
  8,053
  8,545
  9,057
  9,590
  10,147
  10,727
  11,332
  11,964
  12,624
Change in working capital, $m
  -557
  -62
  -68
  -73
  -79
  -84
  -89
  -94
  -99
  -104
  -109
  -114
  -119
  -124
  -129
  -134
  -139
  -145
  -150
  -156
  -163
  -169
  -176
  -183
  -191
  -199
  -207
  -216
  -225
  -235
  -245
Cash from operations, $m
  950
  1,338
  1,527
  1,732
  1,951
  2,183
  2,430
  2,690
  2,963
  3,249
  3,547
  3,859
  4,184
  4,521
  4,873
  5,238
  5,617
  6,011
  6,421
  6,847
  7,289
  7,750
  8,229
  8,728
  9,248
  9,789
  10,354
  10,943
  11,557
  12,199
  12,869
Maintenance CAPEX, $m
  0
  -363
  -427
  -497
  -572
  -653
  -740
  -832
  -929
  -1,032
  -1,139
  -1,252
  -1,370
  -1,492
  -1,620
  -1,753
  -1,891
  -2,035
  -2,184
  -2,339
  -2,500
  -2,668
  -2,842
  -3,023
  -3,212
  -3,408
  -3,613
  -3,826
  -4,049
  -4,281
  -4,523
New CAPEX, $m
  -675
  -1,681
  -1,835
  -1,986
  -2,135
  -2,280
  -2,421
  -2,559
  -2,695
  -2,829
  -2,961
  -3,093
  -3,225
  -3,359
  -3,495
  -3,634
  -3,777
  -3,925
  -4,079
  -4,239
  -4,407
  -4,583
  -4,768
  -4,962
  -5,167
  -5,383
  -5,611
  -5,851
  -6,104
  -6,372
  -6,654
Cash from investing activities, $m
  -674
  -2,044
  -2,262
  -2,483
  -2,707
  -2,933
  -3,161
  -3,391
  -3,624
  -3,861
  -4,100
  -4,345
  -4,595
  -4,851
  -5,115
  -5,387
  -5,668
  -5,960
  -6,263
  -6,578
  -6,907
  -7,251
  -7,610
  -7,985
  -8,379
  -8,791
  -9,224
  -9,677
  -10,153
  -10,653
  -11,177
Free cash flow, $m
  276
  -706
  -734
  -751
  -756
  -749
  -731
  -702
  -662
  -612
  -553
  -486
  -411
  -330
  -242
  -149
  -51
  52
  158
  269
  383
  500
  620
  743
  869
  998
  1,130
  1,265
  1,404
  1,546
  1,692
Issuance/(repayment) of debt, $m
  -90
  1,124
  1,221
  1,322
  1,421
  1,517
  1,612
  1,704
  1,794
  1,883
  1,971
  2,059
  2,147
  2,236
  2,326
  2,419
  2,514
  2,612
  2,715
  2,822
  2,933
  3,050
  3,173
  3,303
  3,439
  3,583
  3,735
  3,894
  4,063
  4,241
  4,429
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -154
  1,124
  1,221
  1,322
  1,421
  1,517
  1,612
  1,704
  1,794
  1,883
  1,971
  2,059
  2,147
  2,236
  2,326
  2,419
  2,514
  2,612
  2,715
  2,822
  2,933
  3,050
  3,173
  3,303
  3,439
  3,583
  3,735
  3,894
  4,063
  4,241
  4,429
Total cash flow (excl. dividends), $m
  122
  418
  487
  571
  665
  768
  880
  1,002
  1,132
  1,271
  1,418
  1,573
  1,735
  1,906
  2,084
  2,270
  2,463
  2,664
  2,873
  3,090
  3,316
  3,550
  3,793
  4,045
  4,308
  4,581
  4,864
  5,160
  5,467
  5,787
  6,121
Retained Cash Flow (-), $m
  -538
  -828
  -899
  -973
  -1,046
  -1,117
  -1,186
  -1,254
  -1,321
  -1,386
  -1,451
  -1,515
  -1,580
  -1,646
  -1,712
  -1,780
  -1,851
  -1,923
  -1,998
  -2,077
  -2,159
  -2,245
  -2,336
  -2,431
  -2,532
  -2,637
  -2,749
  -2,867
  -2,991
  -3,122
  -3,260
Prev. year cash balance distribution, $m
 
  202
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -208
  -412
  -402
  -381
  -349
  -306
  -252
  -188
  -115
  -33
  57
  155
  260
  372
  489
  613
  741
  875
  1,013
  1,157
  1,304
  1,457
  1,614
  1,776
  1,943
  2,115
  2,293
  2,476
  2,665
  2,861
Discount rate, %
 
  5.30
  5.57
  5.84
  6.14
  6.44
  6.76
  7.10
  7.46
  7.83
  8.22
  8.63
  9.06
  9.52
  9.99
  10.49
  11.02
  11.57
  12.15
  12.76
  13.39
  14.06
  14.77
  15.50
  16.28
  17.09
  17.95
  18.85
  19.79
  20.78
  21.82
PV of cash for distribution, $m
 
  -198
  -370
  -339
  -300
  -255
  -207
  -156
  -106
  -58
  -15
  23
  55
  80
  98
  110
  115
  115
  111
  104
  94
  82
  70
  59
  48
  38
  29
  22
  16
  11
  8
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Companhia de Saneamento Básico do Estado de São Paulo - SABESP provides basic and environmental sanitation services, and supplies treated water and sewage services on a wholesale basis to residential, commercial, industrial, and governmental customers in the state of São Paulo. The company operates through two segments, Water and Sewage. It provides water supply, sanitary sewage, urban rainwater management and drainage, urban cleaning, and solid waste management services, as well as related activities, including the planning, operation, maintenance, and commercialization of energy. As of December 31, 2015, the company provided water services through 8.4 million water connections to approximately 25.5 million people; and sewage services through 6.9 million sewage connections to approximately 22.8 million people, as well as operated 71,705 kilometers of water pipes and water transmission lines, and 48,774 kilometers of sewer lines. It also offers water and/or sewage services to other municipalities through special purpose companies; and consulting services regarding the rational use of water, as well as financial, commercial, and operational management services in Panama, Honduras, and Nicaragua. The company was founded in 1954 and is headquartered in São Paulo, Brazil.

FINANCIAL RATIOS  of  Companhia de Saneamento Basico do Estado (SBS)

Valuation Ratios
P/E Ratio 7.9
Price to Sales 1.6
Price to Book 1.5
Price to Tangible Book
Price to Cash Flow 7.7
Price to Free Cash Flow 26.7
Growth Rates
Sales Growth Rate 20.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -12.9%
Cap. Spend. - 3 Yr. Gr. Rate -1.8%
Financial Strength
Quick Ratio 2
Current Ratio 0
LT Debt to Equity 69.5%
Total Debt to Equity 77.6%
Interest Coverage 7
Management Effectiveness
Return On Assets 9.9%
Ret/ On Assets - 3 Yr. Avg. 6%
Return On Total Capital 10.9%
Ret/ On T. Cap. - 3 Yr. Avg. 5.6%
Return On Equity 20.2%
Return On Equity - 3 Yr. Avg. 10.4%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 42.7%
EBITDA Margin - 3 Yr. Avg. 29.6%
Operating Margin 24.3%
Oper. Margin - 3 Yr. Avg. 22.5%
Pre-Tax Margin 29.3%
Pre-Tax Margin - 3 Yr. Avg. 15.2%
Net Profit Margin 20.9%
Net Profit Margin - 3 Yr. Avg. 11.2%
Effective Tax Rate 28.6%
Eff/ Tax Rate - 3 Yr. Avg. 22.2%
Payout Ratio 4.7%

SBS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the SBS stock intrinsic value calculation we used $4457 million for the last fiscal year's total revenue generated by Companhia de Saneamento Basico do Estado. The default revenue input number comes from 2016 income statement of Companhia de Saneamento Basico do Estado. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our SBS stock valuation model: a) initial revenue growth rate of 17.6% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.3%, whose default value for SBS is calculated based on our internal credit rating of Companhia de Saneamento Basico do Estado, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Companhia de Saneamento Basico do Estado.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of SBS stock the variable cost ratio is equal to 74%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for SBS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.9% for Companhia de Saneamento Basico do Estado.

Corporate tax rate of 27% is the nominal tax rate for Companhia de Saneamento Basico do Estado. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the SBS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for SBS are equal to 214.2%.

Life of production assets of 26.3 years is the average useful life of capital assets used in Companhia de Saneamento Basico do Estado operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for SBS is equal to -7.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $4875 million for Companhia de Saneamento Basico do Estado - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 676.909 million for Companhia de Saneamento Basico do Estado is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Companhia de Saneamento Basico do Estado at the current share price and the inputted number of shares is $7.3 billion.

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COMPANY NEWS

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▶ Material Fact   [12:15AM  PR Newswire]
▶ Sabesp Announces 1Q17 Results   [May-12-17 11:53PM  PR Newswire]
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▶ Sabesp's Second Ordinary Tariff Revision - New Schedule   [Apr-26-17 10:17PM  PR Newswire]
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▶ Beginning of the Second Ordinary Tariff Review of Sabesp   [Jan-19-17 09:32PM  PR Newswire]
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▶ Brazil Stocks Slip: Moody's Negative, Olympics Angst   [Aug-01-16 12:45PM  at Barrons.com]
▶ SABESP Announces 1Q16 Results   [May-12-16 07:12PM  PR Newswire]
▶ SABESP Files Its 20-F With The SEC   [May-11-16 10:27PM  PR Newswire]
▶ Will Brazil Impeachment Stall Investments?   [Apr-18-16 12:16PM  at Barrons.com]
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Stock chart of SBS Financial statements of SBS Annual reports of SBS
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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