What a company is worth
A company's value is the sum of all future payments to its owners, discounted to today. The math is simple; the assumptions inside it aren't.
If someone promises to pay you a thousand euros a year for ten years, that's not worth ten thousand euros today. Money in the future is worth less than today, because you have to wait, and because it's uncertain.
That's exactly what a company valuation does. You estimate future payments and discount them back to today. The sum is the intrinsic value. If the price sits well below it, the stock counts as cheap.
The catch is the assumptions. You have to estimate how fast the company grows and what rate to discount at. Small changes to those two numbers change the result dramatically.
That's why a valuation isn't a number, it's a range. Anyone who gives you an exact fair value has either misunderstood something or is selling you something. The exercise is still useful, though, because it shows what expectations are already baked into the current price.
Run this approach systematically instead of for a single company, and you land on Value-Investing as a Systematic Strategy, with its own decades-long body of research.
In the discounted cash flow model, V = Σ CF_t / (1+r)^t plus a terminal value. At typical forecast horizons of five to ten years, the terminal value often dominates two-thirds or more of total value, which means the result is largely determined by assumptions beyond the forecast period.
The terminal value under the growth formula is CF · (1+g) / (r − g). Sensitivity to the gap between r and g is substantial: at r equal to eight and g equal to two percent, raising g by one percentage point produces a roughly twenty-percent-higher terminal value. That sensitivity means point estimates aren't reliable.
More useful in practice than forward calculation is the reverse: solve the model for the growth and margin assumptions that would justify the current price, and judge their plausibility. This avoids the false precision of your own forecast and makes the expectations already embedded in the price explicit.
Summary
- The terminal value usually drives most of the result.
- One percentage point of growth assumption changes value by orders of magnitude.
- More useful than your own forecast is asking what's already in the price.
Did you get it?
Why is money in the future worth less?
Because of the wait and the uncertainty. That's why it gets discounted.
Which part usually dominates a valuation?
The terminal value, meaning the assumptions beyond the actual forecast period.
What approach avoids false precision?
The reverse one: calculate what assumptions would justify the current price.