The key ingredients required to build a DCF valuation model are:
- Historical income statements;
- Historical balance sheets;
- A good understanding of the business’s operating characteristics; and
- Management plans for the immediate future.
Historical income statements and balance sheets provide a good base on which future performance drivers can be assumed or predicted. A good understanding of the business model and its operating characteristics such as the levels of inventory required, credit policies, etc. will help better estimate future performance drivers. Management plans for the immediate future are very important especially if expansion, new investments or changes in strategy or financial policy are expected because these impact projected cash flows.
Most of the ingredients required to project cash flows required for a DCF valuation can be found in the company’s annual reports or in the company’s Form 10Ks. The section titled Management Discussion and Analysis (MD&A) in a company’s Form 10K is a good starting point. Information about management plans can be found in industry reports, earnings calls and media reports.