A Powerful New Measure

RBP® Probability

The probability management will deliver the Required Business Performance to support the stock price is called RBP® Probability and our investment process uses this proprietary metric to select stocks. The RBP® Probability, provides us with an objective, disciplined, rules-based way of measuring management's ability to deliver its Required Business Performance.

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.

In the hypothetical example below, the RBP® Probability is only 35%, indicating that based on management's historical ability to deliver, there is only a 35% probability it will deliver its Required Business Performance®. This makes the company's Behavioral Risk Indicator relatively high, 65%. At Transparent Value we seek to avoid companies with high behavioral risk such as this.