Investment managers have traditionally focused on analytical valuation techniques based on the theory of discounted free cash flows (DCF). Such valuation models are designed to determine the intrinsic value of a stock, which can then be compared to the price of the stock for stock picking purposes. The essence of this valuation approach is a series of educated guesses or assumptions based upon management’s guidance regarding the growth of key business performance drivers specific to the company’s business model, which ultimately produces a highly subjective valuation of a company’s stock.

Although this method is fundamentally sound, we feel the subjectivity involved makes it unusable as a practical matter.

Instead, at Transparent Value, we reverse the traditional DCF method by starting with the value of a stock as determined by the market. Our methodology is a reverse discounted free cash flow analysis utilizing a company’s current stock price, its income statement, balance sheet and cash flow statements to determine what the current price of its stock implies about future free cash flow (FCF), revenue growth and RBP^®  . This process is fact driven forecast free and avoids the highly subjective process of forecasting the unknowable future.