Valuation - Discounted Cash Flow

It's the process of estimating the value of a company or investment based on the cash flow it expected to generate in the future at the present value date.

Simplify the terms

its basically gathering the necessary information in terms of the company’s ability to generate revenue (cash flow) at present or future period. Those future generating cash flow would need to discounted back to present value in order to measure apple to apple the monetary value worth of the company’s value.

Components involved

Weighted average cost of capital (WACC)

It is the calculates cost of a company’s raise its funding, ranging from bonds, long-term debts, common stock, preferred stock and the likes.

Cash flow generating

It involves new feasible project that would be a game changer, distorting the norm of business in terms demand for services or products, creating a ‘temporary’ MOAT in 2 - 5 years horizon.

The challenges

It forms a challenge when using discounted cash flow to analyse startup company that would requires heavy funding at the initial stage to grow its business operations, as high costs of capital couple with uncertain or volatile earnings would resulted in fluctuation in the discounted cash flow.

Companies that having minimal debts leveraging would surely be better to survive in situation of Interest rate hike (currently we are all experiencing).

Of course other factors such as stock options or compensation payout which is good to retain talented top executives, but bad as it create future liabilities that will increase company’s cost of capital hence reduces the value worth of discounted future cash flow.

With any estimation, some degree of projection comes into play.

How do one digest information and manage to see through the market noise would be the one left standing at the end of the investing journey.

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