Valuation Methods Explained
Stock valuation is both an art and a science. Let's explore the two primary methods investors use.
Discounted Cash Flow (DCF)
DCF analysis estimates a company's intrinsic value by projecting future cash flows and discounting them to present value.
Pros: Fundamental, comprehensive, forward-looking
Cons: Requires many assumptions, sensitive to inputs
Valuation Multiples
Compare a company's metrics (P/E, EV/EBITDA) to industry peers or historical averages.
Pros: Quick, simple, market-based
Cons: Can be misleading, ignores company-specific factors
Which Should You Use?
The best approach? Use both! DCF for intrinsic value, multiples for market context.