The Roadmap of a Cash Dupont Analysis and Its Impact on Stock Valuation Strategy

It is a common belief that capital intensive corporations are associated with relatively low profit margins. They operate in environments where it may be a struggle to keep returns in excess of their capital costs. This further implies a possible decline in stock value because of these lower margins. This paper extends the financial literature on the effects of capital intensity on firm performance through the introduction of the Cash DuPont Model in conjunction with a Monte Carlo Simulation. The model’s use of the free cash flow to equity (FCFE), cash conversion factor (CCF), and resulting Cash ROE ultimately leads to the determination of the fair price to book value multiple. All of these data metrics are blended into a process of stock price valuation that explains both the possibility and probability of the mispricing of a stock. The results reveal that a capital-intensive firm can show undervalued tendencies despite low profit margins.