What Is A Valuation Model?
Quite simply, it is a method or tool to carry out the valuation of a stock. The objective is to come up with an estimate of how much a share of stock is actually worth given the fundamentals of the company behind the stock. The most common way of gauging the price of a stock is to use rule of thumb PE values. This method is okay if all you’re looking for is a quick comparison among similar companies. But if you want to get a better estimate, you have to use a more rigorous analysis. More rigorous does not mean complicated. Let’s take a look at the two valuation models we’ve used with great success…. • Discounted Cash Flow (DCF): The main idea behind a DCF model is relatively simple. If you add up all the future cash flows you estimate a company will encounter, discount it to today’s value, you get a fairly good idea of how much a company is worth. • Earnings Projection using the EPS-PE relationship: This method projects out the Earnings per Share (EPS) several years into the future,
