How to Select the Optimal Valuation Method to Build Better Price Targets (Part 3 of 3)
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As noted in Part 2 of this 3-part series, there are limitations to every valuation method, but some are better than others. For years I had been looking for an information source that quickly summarized the best method(s) to use under each circumstance, but couldn’t find one. So I created the flow chart below.
The idea is to start at the top of the flow chart and work your way down as far as possible, to get closer to the methods that measure free cash flow. Note the blue shapes are single-period multiples-based methods whereas the tan shape, DCF, is a multi-period cash flow method.
Callout: The further you can go through the flowchart, the closer you are to valuing the company’s free cash flows.