Valuation: DCF & Comps

What This Skill Does

This is how to put a defensible value on a company — one you'd anchor a thesis around. Not a spreadsheet exercise; a reasoning exercise backed by a spreadsheet. The two methods (DCF + comps) triangulate to a value range; neither is sufficient alone. A DCF alone is too assumption-sensitive; a comps alone ignores business-specific economics.

Good valuation is scenario-aware (bull / base / bear), assumption-explicit (every important number has a source + a sensitivity), and reconciled (DCF + comps land in similar range, or you explain the divergence).

Part 1 — Discounted Cash Flow (DCF)

Core idea

Company value = present value of all future free cash flows (FCF), discounted at the company's cost of capital. It's an intrinsic-value method — in theory, independent of what "the market" is paying.

The recipe

1. Project FCF for 5–10 years. Revenue × margins → EBIT → taxes → D&A adj → CapEx → WC changes → FCF.
2. Calculate terminal value (Year N+1 onward). Two methods: perpetuity growth (FCF × (1+g) / (WACC − g)) or exit multiple (FCF × terminal multiple).
3. Discount each year's FCF + terminal value back to today using WACC.
4. Sum = enterprise value. Subtract debt + add cash = equity value. Divide by shares = per-share intrinsic value.