Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

CONCLUSION

FCF analysis provides a useful and relatively simple starting point for equity valuation. The approach has several limitations, however, including one shared by all valuation techniques: Estimating growth, which is at the heart of the matter, cannot be avoided and can never be other than subjective. The analyst or investor who can systematically estimate growth with precision has a powerful advantage indeed. But for the vast majority who do not have that advantage, FCF analysis can still organize a thought process that links the company’s performance with that of its stock. FCF analysis can be refined in many ways, but in its purest form, it has a virtue not shared by all valuation approaches: FCF provides the simplest possible picture of the potential benefits from investing in a company.