IDENTIFY STOCKS FOR VALUE INVESTING
STRUCTURED VALUATION
WHAT IS A DCF MODEL?
A Discounted Cash Flow (DCF) model is a structured financial valuation method used to determine the intrinsic value of a business, asset, or investment by estimating its future cash flows and discounting them back to their present value using an appropriate rate of return.
In professional finance, this model is considered the gold standard for valuation because it incorporates both the company’s operating performance and the market’s required rates of return. The essential idea is that a firm’s value equals the sum of all the cash it is expected to generate, adjusted for the risk and timing of those cash flows. It reflects the fundamental principle - applicable to any financial asset - that a company’s worth is determined by the cash it can produce for its capital providers, appropriately adjusted for both time and risk.
What exactly does a DCF Model do?
A DCF model analyzes a company's ability to generate operating cash flows over time. The company’s free cash flows from operations are evaluated as the primary source of value creation. These cash flows represent the funds available to all capital providers. Because these flows occur over multiple future periods, they are converted into their present value by applying discount rates that reflect the specific risk profile of the business.
A DCF model typically combines a detailed forecast period, in which the firm’s performance is projected explicitly, with a terminal period capturing its residual value beyond the forecast horizon. The terminal value assumes that, after the projection phase, the company achieves a stable and sustainable growth path consistent with long-term economic trends.
What makes the DCF framework both professional and academically robust is its theoretical coherence and analytical transparency. It links a company’s valuation directly to its measurable financial performance rather than to market sentiment or relative multiples. This alignment with modern finance theory - where value arises from the present worth of expected future benefits - makes it one of the most rigorous tools for appraisal. When applied correctly, the DCF model provides a comprehensive, internally consistent view of a firm’s intrinsic economic value, forming a cornerstone of professional investment analysis and corporate financial management.
DCF Models used by VIAVALENS
The DCF models utilized by VIAVALENS are grounded in more than 25 years of corporate finance experience; the applied methodology is rigorously field-tested and adheres to investment banking standards.
To ensure maximum transparency in underlying assumptions, we systematically project free cash flows by forecasting revenues, operating margins, taxation, and reinvestment requirements - net of depreciation and amortization - over a ten-year horizon prior to determining the terminal value.
VIAVALENS specializes in the widely accepted entity approach, employing risk-adjusted discount rates that are assessed individually for each company and for every relevant point in time. This method evaluates the total operational cash flows generated by the business, which are available to all capital providers - both debt and equity holders -irrespective of the company’s financing structure.
Central to the entity approach is the application of the weighted average cost of capital (WACC) as the discount rate. The WACC represents the blended required return from all funding sources, proportionally weighted by their share in the company’s capital structure, and adjusted for the specific risk profile of the business. By discounting the projected cash flows and terminal value at WACC, the model adequately reflects both the time value of money and the opportunity cost of capital faced by investors.
In addition to the current interest rate environment, we incorporate the systematic risk of the company's industries and the country risk of both the home location and key sales regions, using credit default swap spreads observed in the capital markets. Instead of relying solely on traditional regression betas, we utilize so-called bottom-up betas for the relevant industries in which the company operates. As a result, the discount rates applied reflect individual company risk, incorporating sector and geographic factors.
The sum of the discounted cash flows yields the enterprise value, which represents the total value of the business’s operating assets. To arrive at the equity value, we deduct net debt and other non-equity claims from the enterprise value. Drawing on our extensive expertise, our models account for net debt as well as other relevant items like unfunded pension obligations and minority interests, factors often omitted in public models.
This VIAVALENS approach offers a rigorous and widely accepted framework for determining a company’s intrinsic value.