Frequently Asked Questions
Glossary
RBP®
The revenue growth necessary to support the current stock price. Required Business Performance® is used as a benchmark against which to measure management’s ability to perform in the future. It is calculated using a reverse discounted cash flow valuation model that uses the current stock price as the primary input.
RBP® Probability
The likelihood that management will deliver the Required Business Performance® to support the stock price. It is calculated by fitting the company’s historical revenue growth to a distribution, then finding the company’s Required Business Performance within this historical distribution.
In the hypothetical example below, the company’s RBP® Probability, represented by green, is 35% while its Behavioral Risk Indicator, represented by red, is 65%. RBP® Probability
Behavioral Risk Indicator
The likelihood that investors’ systematic behavioral biases have caused misalignment between the stock price and management’s ability to deliver. The Behavioral Risk Indicator is designed to capture the impact that human psychology has on the subjective valuation process used by investors. It is defined as one minus the RBP® Probability.
In the hypothetical example below, the company’s RBP® Probability, represented by green, is 35% while its Behavioral Risk Indicator, represented by red, is 65%. Behavioral Risk Indicator
RBP® Methodology
A system of fundamental stock analysis that uses a reverse discounted cash flow valuation model to determine what the stock’s current price implies in terms of future free cash flow and revenue (Required Business Performance® ) as well as the calculation of the likelihood that management can deliver the Required Business Performance®, known as RBP® Probability.
RBP® Platform
The Transparent Value decision support tool consisting of an interactive database containing the proprietary data produced by Transparent Value. Included are the Required Business Performance® (RBP® ) values, RBP® Probabilities and Behavioral Risk Indicators for more than 2,000 global stocks, the Transparent Value mutual fund rating system providing coverage of more than 3,000 funds, and also broad market indicators.
RBP® Snapshot
Provides updated company-specific RBP® information based on the company's most recent quarterly financial data. The RBP® Snapshot consists of the RBP® probability and RBP® values for a particular company.


What is the RBP® Methodology?

The RBP® Methodology is the system of analysis used by Transparent Value analysts. RBP® stands for Required Business Performance and represents the level of performance that a company must deliver to support its current stock price. Stock prices are not arbitrary, although they may often seem that way. The aim of the RBP® Methodology is to reveal the information contained in the stock price within a concise, easy-to-understand metric.

What is RBP® Probability?

Knowing a company’s Required Business Performance (RBP®) is only half the battle, however. The next challenge for the investor is to determine if that level of performance is attainable. To aid in this process, Transparent Value calculates the probability of the RBP® being met. RBP Probability is calculated by fitting historical levels of business performance to a distribution curve and then finding the company’s RBP within this distribution.

How is the RBP® Methodology different from other approaches to investing?

Most equity analysts make assumptions about the future of a company and then decide what is an appropriate price for the stock based on those assumptions. The RBP® approach takes the opposite approach. Without taking a stance on whether the current stock price is appropriate, we simply begin with the current stock price and work backwards to determine what assumptions the market as a whole has implicitly made. We can then ask ourselves, Can it be done? Can the company deliver the level of performance that the current stock price implies?

Who performs the analysis for Transparent Value?

Transparent Value has a staff of more than 100 MBA accredited analysts.

What is Transparent Value hiring process?

Analysts are generally hired straight out of business school. This is intentional on the part of management as talented young professionals are more likely to adapt to the RBP® philosophy and Transparent Value’s innovative approach to equity analysis.

The recruiting process requires two examinations prior to an interview. The first is an electronic standardized test on general finance, economic, and accounting principles. The pass rate is approximately 25%. For those who pass, a second test is given that relates directly to the construction of financial statements, where a pass rate of 25% or less is estimated. Those who pass are invited for a half-day interview process, consisting of three rounds. The first round is with one of the analysts, followed by interviews with a team leader and a manager.

The following is an example of the recruiting process:

  • 200 applicants
  • 50 pass the first test
  • 10 pass the second test and are interviewed
  • 2 to 3 are offered employment

Do analysts undergo a training program to learn RBP® Methodology?

Training takes approximately six weeks where initial education covers the basics of finance and accounting, valuation using discounted free cash flows, introduction to templates and business models, adjusting for mergers/spin offs and negative cash flow situations, and model construction. The later part of training is customized to the current needs of a specific company, focusing on models and back-testing for stocks within an industry that the analyst will potentially be responsible for.

Analyst coverage is phased in after training, with other analysts on the team assisting until the analyst reaches capacity. Capacity is generally reached in 17 to 18 weeks. The team leader is responsible for distributing coverage and can evaluate progress. The team approach continues with peer reviews and backup coverage.

Is there universal/standard approach to analysis, i.e. number of templates?

There are seven templates designed around the structure of financial reporting standards for various industries. The templates contain the discounted free cash flow models, RBP® calculations, and probability calculations. While the format of the financial statements differs, the underlying calculation of RBP® is the same.

Standard templates cover the following industries:

  • Energy/Oil & Gas
  • Real Estate
  • Banking
  • Home Builders
  • Broker Dealers
  • Insurance
  • Commercial

The most common industry classification, Commercial, refers to all sectors that do not fall into one of the other categories. In addition to the broad templates, there are standardized business models for various industries. These are the models that evaluate a diversified company’s individual lines of business and their contribution to total RBP®.