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- Topic 3.3: Absolute Valuation: Discounted Cash Flow (DCF) Analysis - Part 1 (Theory & Projections)
Topic 3.3: Absolute Valuation: Discounted Cash Flow (DCF) Analysis - Part 1 (Theory & Projections)
Learn the fundamentals of Discounted Cash Flow (DCF) analysis. Our guide walks you through forecasting revenue, margins, and free cash flow (FCF) to estimate a company's intrinsic value. The first step to mastering absolute valuation.
Milan Reichl
June 18th, 2025 • Reading Time: 13 minutes
Absolute Valuation: Discounted Cash Flow (DCF) Analysis - Part 1 (Theory & Projections)
Alright, welcome back to our valuation journey! In our last session, Topic 3.2: Relative Valuation Models, you learned the powerful technique of "pricing" a stock by comparing it to its peers—an essential tool for gauging market sentiment in a heartbeat.
But what happens when the entire market seems to have lost its mind? What if a stock's peers are all caught up in a speculative frenzy, making them useless as a benchmark? Or what if the company you're analyzing is a true pioneer, a one-of-a-kind business with no real competitors to compare it to? In these moments, relative valuation falls short. To find true, durable value, we need a method that ignores the market's noisy chatter and focuses on the fundamental, standalone economic reality of the business itself. We need a tool of Absolute Valuation.
Get ready, because we are about to unveil the undisputed heavyweight champion of absolute valuation, the method that sits at the very heart of how legendary investors like Warren Buffett determine what a business is truly worth: the Discounted Cash Flow (DCF) analysis.
Mastering this single technique is like gaining a superpower. It allows you to look past the ephemeral stock price and see the real, cash-generating engine underneath. It's the closest thing we have to a "first principles" approach to valuation, grounding our decisions not in fleeting opinions, but in the bedrock of business economics. It might sound complex, but the core idea is so simple and intuitive that it will forever change how you think about value. But to truly harness its power, you must first grasp one of the most fundamental truths in all of finance...