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Levered Returns – Making discounted cash flow analysis easy and accessible

Sindhu Kashyap
posted on 23rd April 2015
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Understanding discounted cash flow analysis can be quite confusing and difficult. Especially understanding how stock analysts come with the right or fair value for companies or why the price varies so much. Discounted cash flow basically works out the value of a company on the basis of projections of the money it is going to make in future.

While in most cases, the trade analysts’ work on the DCF (discounted cash flow analysis), Levered Returns is a new website that works towards reducing the confusion of setting up a DCF analysis. Not only does Levered Returns, a US based platform, claim to make the process simpler but also gives one the ability to share different kinds of DCF models.

Background

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Levered Returns was the brainchild of investment bankers Matthew Hogan and Andy Pai, who were colleagues at Duff & Phelps. After graduating from Indiana University, Matthew worked at Duff & Phelps as an investment banking analyst. “My role there was to provide merger and acquisition advisory services, and transaction opinion services. We had to value companies every single day,” says Matthew.

The duo had planned to start investing on their own capital in the equity market in their free time. They decided to apply the same fundamental valuation that they used on a day-to-day basis at Duff & Phelps. It was when they started doing this on their own they realized the difficulty of the process. “It was a pain to create a discounted cash flow model and a comparable company analysis,” adds Matthew.

The Problem

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They realised that they were spending close to 90 percent of their time organizing and gathering the data than actually analysing the data. After researching online for platforms that could help them streamline the process, both Matthew and Andy found that there wasn’t anything available online to make the process simpler.

So Matthew Hogan along with Andy Pai and two other co-founders – Brian Dentino and Matt Mueller decided to start Levered Returns. For Andy, the idea of Levered Returns was to reduce the underdog mentality people have towards investment. He adds, “I really believe performance should be based on what you do with information, not your access to it.”

Brian Dentino is an engineer, who believes in understanding the processes behind things. If he did not understand something, he would not use it and that was his initial attitude towards the stock market. With Levered Returns, he was able to bring an understanding into the factors that impact the value of a company.

This gives you the comfort drawing your own conclusions. That kind of confidence makes investing much less intimidating for people like me,  says Brian.

They decided to create a platform that helped investors make their investment decision making process a lot simpler.

Journey and current solution

After quitting their respective jobs, and taking two months for travel and research, the team then concentrated on building the platform. While the four founders had an idea of what they wanted to do, they were rather unsure about where it would lead them to. They started out with building a very minimal product, which basically was a spreadsheet in a web browser. They also create a very basic ‘bare bones’ discount cash flow model.

After putting up articles and their work on sites like Seeking Alpha, the team got some meaningful feedbacks, which lead them to create interactive spreadsheets. Today Levered Returns is more of a Social Stock Analysis platform. With this platform not only can individuals build their own cash flow models but also share them with others and gain needed feedback.

Matt Mueller one of the founders says,

Investing is a powerful tool for growing and maintaining wealth, yet most people invest their money based on gut decisions and reactionary news. We're building Levered Returns to give everyone the tools to make smarter, more informed investment decisions.

Way forward and future solutions

Matthew says:“Investors need to do three things in their investment decision making process:

  1. Understand the company’s business
  2. Determine the value
  3. Monitor the growth and progress of that company”

Levered Returns decided to make these three processes a lot less cumbersome. For the first step of understanding the company’s business, Levered Returns plans to createMeta data where they can tag various different news articles. They even aim for people to submit, upload and download different articles and details relating to a particular company.

For the next step of determining the value of a company, Levered Returns has pre-built models for over 3000 companies, which easily gives you the share market value of the companies. They are also planning to create monitoring tools that ensure when a company hits a share value target, individuals will receive an email notification on the same.

“The software layer is quickly penetrating older business models. If you look at platforms today like Udemy, Airbnb, and Instagram, it is about organising the content and providing tools to interact with that content. That is exactly how we envision Levered Returns to be for the investment segment,” adds Matthew.

In the near future, Levered Returns aims to bring in more collaboration and activity. They are also looking at building premium services that will be available for a fee.

Levered Returns

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