Four ways to value one company

There is no single number that is a company’s value. There are methods, each resting on its own assumptions, and the useful discipline is to run more than one and see where they agree and where they part. This post walks through four: a discounted cash flow model, owner earnings, an EV/EBITDA cross-check, and a residual-income model. It uses no company’s figures on purpose. The subject is the method, not a verdict on any name.

A note before the methods: none of these produces a price target. Each produces an estimate conditional on inputs you chose, and the inputs are where the real judgment lives.

1. Discounted cash flow

The foundational method. The value of a business is the present value of the cash it will generate over its life, discounted at a rate that reflects the risk of those cash flows. Aswath Damodaran of NYU Stern frames intrinsic value as the value “an all-knowing analyst with access to all information available right now and a perfect valuation model” would assign, estimated in practice from an asset’s expected cash flows, growth, and risk.

What it assumes: that you can forecast free cash flows over an explicit horizon, pick a terminal value beyond it, and choose a discount rate. Its honesty is also its weakness. Small changes in the growth rate or the discount rate move the answer a lot, and the terminal value often dominates. Damodaran is blunt about the discount rate in particular: in his DCF notes he warns that “errors in estimating the discount rate or mismatching cashflows and discount rates can lead to serious errors in valuation.” A DCF is only as good as the assumptions you can defend, and it forces you to write them down, which is its real value.

2. Owner earnings

A cash-focused correction to reported profit. Warren Buffett defined it in the appendix to his 1986 letter to Berkshire Hathaway shareholders as “(a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges … less © the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume.”

What it assumes: that maintenance capital spending, the amount needed just to stand still, can be separated from growth spending. That split is a judgment, not a line on the financial statements, and it is where two analysts will disagree. Buffett is candid that this makes the method inexact: his equation “does not yield the deceptively precise figures provided by GAAP,” because item © “must be a guess, and one sometimes very difficult to make.” That is a feature, not a flaw: it is a discipline rather than a formula. Owner earnings is less a standalone valuation than a cleaner cash number to feed into a DCF, and Buffett’s point was that reported earnings and reported cash flow both flatter capital-hungry businesses that this adjustment exposes.

3. EV/EBITDA cross-check

A relative-valuation sanity test. Rather than discount cash flows, you compare the company’s enterprise value to its EBITDA and ask whether that multiple is reasonable against comparable businesses. Damodaran’s caution is worth keeping in view: “the problem with multiples is not in their use but in their abuse,” and a multiple only means something against genuinely similar companies, because every multiple embeds the same growth, risk, and cash-flow drivers as a full DCF.

What it assumes: that the peer set is truly comparable and that EBITDA approximates cash generation. For capital-intensive businesses it does not, because EBITDA ignores the capital spending those businesses cannot avoid, which is why analysts sometimes use EV to EBITDA minus capex instead. Treat this method as a cross-check on the intrinsic estimates, not as the estimate itself. When the multiple and the DCF disagree sharply, that disagreement is information.

4. Residual-income model

An accounting-anchored approach. It starts from the current book value of equity and adds the present value of future “residual income,” defined as net income minus a charge for the cost of the equity capital employed. The idea traces to Ohlson (1995), “Earnings, Book Values, and Dividends in Security Valuation,” which expresses equity value as current book value plus the discounted stream of expected residual income. Dechow, Hutton, and Sloan later tested that framework directly; their empirical assessment of the residual income valuation model (Journal of Accounting and Economics, 1999) is a check on how well Ohlson’s formula performs against real data, not the original source. A company only creates value when it earns more than the required return on the capital shareholders have tied up in it.

What it assumes: that book value and future earnings are measured well enough to trust, and that you can specify the cost of equity. Its appeal is that most of the value is anchored in the balance sheet you can observe today, with less riding on a distant terminal value than a DCF. Under clean-surplus accounting the model is formally equivalent to a dividend-discount DCF, so when they diverge in practice the cause is almost always the accounting inputs. Its weakness is exactly that: accounting choices flow straight into the answer.

Why the output is a range, not a target

Run these four and you will get four numbers, not one. That is the point. Each method leans on different assumptions, so the spread between them tells you how sensitive the valuation is to what you cannot know precisely. A sensible way to report the result is a bear, base, and bull range: a low estimate built from conservative inputs, a central case, and a high estimate from optimistic ones.

That range is a model estimate, conditional on inputs. It is not a price target and should never be presented as one. A price target implies a forecast of where the market will trade the stock, which depends on sentiment, flows, and events no valuation model contains. What these four methods give you is a disciplined statement of what the business appears to be worth under stated assumptions, with the honesty to show how wide the band is when the assumptions move. Where the four methods converge, you can hold the estimate with more confidence; where they scatter, the scatter itself is the finding.

None of this replaces judgment, and none of it is investment advice. Four defensible methods and an honest range are what a valuation can offer; what you do with that range is a separate decision.