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PR Newswire
12-12-2023, 08:14 AM
As a fundamental investor, comparing market price and the fundamental or intrinsic value of companies is critical. There are several ways to do this. Many rely on relative valuation while I prefer to use the DCF approach.
The main challenge with using relative valuation is finding comparable companies. But even if we can agree on them, relative valuation has limited use.
The key input in estimating the value of a company is forecasting the future cash flow. Most of the time there might be a period of high growth followed by a more stable growth. I find that it is easier to handle this with a DCF approach.
Secondly, the DCF approach allows me to do sensitivity analysis. And I could consider several risk situations by varying the discount rate. Imagine trying to do all of these with relative valuation.
For more insights about the practical issues in analysing and valuing company, refer to “Can we learn anything from investment case studies?”
The main challenge with using relative valuation is finding comparable companies. But even if we can agree on them, relative valuation has limited use.
The key input in estimating the value of a company is forecasting the future cash flow. Most of the time there might be a period of high growth followed by a more stable growth. I find that it is easier to handle this with a DCF approach.
Secondly, the DCF approach allows me to do sensitivity analysis. And I could consider several risk situations by varying the discount rate. Imagine trying to do all of these with relative valuation.
For more insights about the practical issues in analysing and valuing company, refer to “Can we learn anything from investment case studies?”