New Video: V6: The Discounted Cash Flow (DCF) Method

In order to value an overall company, perhaps the single most rigorous method, is to look at all of the cash flows - over the life of the company and discounting them back to a value for these cash flows today. One can either look at the cash flows to the overall company (and subtract the value of the debt on the balance sheet to arrive at a value for the equity of the company), or one can start by looking at the cash flows to equityholders.

This method is rigorous in that it aims to capture a lot of information about the company, far into the future. These cash flows are inherently very difficult to predict, and also, they then need to be discounted at an appropiate discount rate which reflects their risk.

New Video: V5: The Dividend Discount Model (DDM)

As long as we hold a stock, the only cash flow that we receive is the dividend, that the company pays out of it earnings/net income (the remainder is retained earnings). This method of valuing stocks looks at the value of the stock as the value of the cash flows that we can expect to receive as dividends. Some companies don't pay dividends and one can has to make significant assumptions about dividends into the future (which clearly have a big impact on the calculated result) - so like all of the methods, it is not always applicable and certainly not without assumptions and disadvantages - but it does take mean looking and thinking about the real expected cash flows and is certainly a method often used and often spoken about.

New Video: V4. The P/Book Ratio

In this fourth video on valuation, the P/Book ratio is discussed. Like all of the valuation methods, it has advantages and limitations - and perhaps more importantly, times when it might be relevant and times when less so - more for companies that have tangible book values that can be determined and where the assets are more tangible and relevant to the companies productive capacity ultimately, less so for companies where the book value does not capture value such as goodwill or a brand that might also not be reflected in the balance sheet.

New Video: V3: The Price/Sales Ratio

Early stage companies often do not have earnings, or have negative earnings or they have earnings that at changing so much that they are not considered a useful measure. Furthermore, earnings can be affected by depreciation policy or even one-off extraordinary expenses or gains that might depress or inflate earnings.

In all of the above situations, the Price to Sales Ratio might be a more useful, or complemenetary valuation tool. The characteristics of the P/Sales ratio are discussed in this video.