Should you pick funds that practice discounted cash flow analysis?

The pursuit of quality, higher future cash flows, and stable growth

Yan Barcelo 20 June, 2019 | 10:48AM

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How do you go about estimating the absolute value of any company? Estimating a stock's fair value, or intrinsic value, is no easy task. In fact, it is quite complex, involving all kinds of variables that are themselves tough to estimate. Morningstar analysts use discounted cash flow modeling to estimate the intrinsic value of stocks. The main idea behind this model is relatively simple: a stock's worth is equal to the present value of all its estimated future cash flows. Putting this idea into practice is where the difficulty lies.

One of the most elaborate methods for establishing the value of a company, discounted cash flow analysis (DCFA) has a lot of credibility. If one understands value in the sense of “quality”, then DCFA potentially leads to tangible performance results. It strives to project future cash flows and bring them back to present value by applying a discount rate.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Facebook Inc A166.80 USD0.51
Uber Technologies Inc27.92 USD0.32

About Author

Yan Barcelo  is a veteran financial and economic journalist with more than 30 years of experience, writing for many publications in Toronto and in Montreal, including CPA MagazineLes Affaires and Commerce.