Valuing means answering a simple and formidable question: what is this company really worth, independently of what the market says about it today? Two broad approaches coexist.
Method 1: DCF (discounted cash flow)
The idea: a company is worth the sum of all the cash flows it will generate in the future… brought back to their value today. Because a euro in ten years is worth less than a euro today (inflation, risk, opportunity cost). Each future flow is therefore “discounted” by a rate.
The discount rate reflects risk: the riskier the company, the higher the rate, and the lower the value.
The weakness of DCF
A DCF is extremely sensitive to its assumptions: change the growth rate by 2% or the discount rate by 1%, and the value can move by 30% to 50%. It is a tool for reasoning, not a truth machine.
Method 2: multiples (comparables)
More pragmatic: you look at the multiple (P/E, EV/EBITDA) that comparable companies trade at, or the multiple this stock has traded at historically, and apply it to the current fundamentals. Simple, quick and anchored in reality — but it assumes the reference is itself correctly valued.
The margin of safety
Benjamin Graham made this the heart of his doctrine: since every estimate is imprecise, only buy if the price is significantly below your estimate of value. That gap is your cushion against your own mistakes.
In Earnnest
The Valuation tab applies the multiples method: historical median multiple × earnings per share, with a margin of safety and a neutral verdict. The calculation is identical for every user — a factual benchmark, not a recommendation.
À retenir
- ✓DCF = rigorous but hypersensitive to assumptions; multiples = pragmatic but dependent on the comparables.
- ✓The two methods complement each other: do they converge? If not, why?
- ✓Always demand a margin of safety: your estimate will be imprecise — accept it.