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Applying Discounted Cash Flow (DCF) in Value Investing

So how does one apply Discounted Cash Flow (DCF) in Value Investing?

The answer is that one doesn't.

DCF and similar analyses require subjective projections into the future which are outside the domain of Value Investing. Any DCF analysis requires future free cash flow projections to discount them to arrive at a present value estimate.

Warren Buffett and his mentor — Benjamin Graham— have both spoken about the futility of financial projections on multiple occasions.

Important Balance Sheet Ratios for Stock Selection

Benjamin Graham - Warren Buffett's mentor and the founder of Value Investing - recommended checking for the following important Balance Sheet ratios in his stock selection framework.

1. Quick Ratio.
2. Current Ratio.
3. Debt/Equity Ratios (for evaluation of Public-Utilities and Financial Enterprises).

Graham's full stock selection framework includes 17 qualitative and quantitative rules using multiple ratios and metrics.

Graham Resources