Valuation Methods Applied

Introduction

Valuation answers: what is this company worth? This lesson covers the main methods and how to apply them sensibly.

Why Value Matters

Price is what you pay; value is what you get. Buying well below value creates a margin of safety.

Cash Flow: DCF

Discounted Cash Flow (DCF):

• Project future free cash flows
• Discount them back to today using a required return
• Sum = estimated intrinsic value

Multiples

Relate the price to a metric:

• P/E — price / earnings
• EV/EBITDA — enterprise value / earnings before interest, tax, D&A
• P/B — price / book value

Comparables

Look at what similar companies trade at:

• Same industry, similar growth and margins
• Derive a fair multiple range
• Apply it to earnings/cash flow

Choosing the Method

• DCF for companies with predictable cash flows
• Multiples/comps for quick cross-checks and in most markets
• Use several methods and look for agreement (a 'sanity check')

The Discipline

Valuation is an estimate, not a precise number:

• Range, not a single point
• Cross-check with sensitivity (next lesson)
• Never rely on one method alone

Summary

• Value = estimated worth; price is what you pay
• DCF discounts future cash flows
• P/E, EV/EBITDA, P/B relate price to fundamentals
• Comparables use peers for a fair range
• Use several methods and treat value as a range

Next Lesson

Stress-testing the estimate: scenarios and sensitivities.