DCF Analysis

Discounted Cash Flow analysis — the approach to business Valuation that estimates what a company is worth by projecting its future cash flows and discounting them back to present value. The alternative to ratio-based shortcuts (P/E, EV/EBITDA) is to build the assumptions explicitly rather than burying them in a multiple.

Tren Griffin offers the practitioner’s framing: DCF is a source of informational edge — but only for a focused investor who knows the business well. His formulation: “Anyone who says they’ve done a DCF for scores of stocks is fooling themselves or raising more money from investors. The greater your focus, the better your DCF.” The constraint is that you can only build a credible DCF for businesses you understand deeply enough to have a real view on the assumptions. Griffin follows Josh Wolfe’s dictum that “edge can derive from informational, analytical or behavioral sources” — DCF is his analytical edge, applied narrowly.

The tradeoff against Comparable Companies (comps) analysis: comps are easier to run and easier to present, but they bury the assumptions in the multiple. Griffin: “An easier way to raise money is to have a portfolio of many stocks based on ratios which are a shortcut for a DCF (i.e., the assumptions are buried).” Embracing complexity through DCF is a moat — few investors will bother, which creates the edge.

Ali (@AliTheCFO) captures the foundational humility: “It’s more art than science… the value of something is dependent on how much someone is willing to pay for it.” A DCF produces a range, not an answer.

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