Valuation method
Income approach: discounted cash flow (DCF)
Values a company by the cash it will generate, brought back to today at a rate that reflects the risk.
When to use it
- The company has a forecast you can defend
- Value comes mainly from future earnings
- You need to show which assumptions drive the value
What you need
- A forecast of 1 to 10 years
- The capital structure for WACC, or a required return
- A growth rate, or an exit multiple of EBITDA
- The zakat rate
How it works, step by step
- 1
Forecast free cash flow
For each year: operating profit after zakat, plus depreciation, less capital expenditure and the change in working capital.
- 2
Set the discount rate
Use WACC, built from debt and equity, or a required return set for the investor.
- 3
Add the terminal value
Use Gordon growth (the last cash flow growing at a fixed rate) or an exit multiple of the last year's EBITDA.
- 4
Discount to today
Divide each cash flow and the terminal value by (1 + r) raised to its year, then add them up.
Worked example
A five-year forecast, WACC of 14% and terminal growth of 3%. Amounts in SAR million.
| Free cash flow, years 1 to 52.0 · 2.6 · 3.1 · 3.5 · 3.8 | |
|---|---|
| Present value of the cash flows1.75 + 2.00 + 2.09 + 2.07 + 1.97 | 9.89 |
| Terminal value3.8 × 1.03 ÷ (0.14 - 0.03) | 35.58 |
| Present value of the terminal value35.58 ÷ 1.14⁵ | 18.48 |
| Value | 28.37 |
The terminal value is about 65% of the result, so its inputs deserve the most care.
Methods in TaqeemTech
Pick one or both terminal models and one or both discount rates. Each pair is a method with its own weight.
Gordon growth at WACC
Perpetual growth after the forecast, discounted at the company's cost of capital.
Gordon growth at a required return
Perpetual growth, discounted at the return the investor requires.
Exit multiple at WACC
A sale at a multiple of the last year's EBITDA, discounted at the cost of capital.
Exit multiple at a required return
A sale at an EBITDA multiple, discounted at the investor's required return.
Strengths · Limitations
Strengths
- Reflects the company's own plans and economics
- Shows which assumptions drive the value
- Works when no comparable companies exist
Limitations
- Very sensitive to the discount rate and terminal growth
- Only as reliable as the forecast behind it
- The terminal value often makes up most of the result
How TaqeemTech helps
- Free cash flow computed from your forecast
- WACC calculated from the capital structure
- Each method weighted within the approach
Common questions
Close to the economy's long-term growth, and always below the discount rate.
WACC suits companies with a stable capital structure. A required return suits investors in young companies. You can run both and weight them.
This guide explains general valuation practice and how TaqeemTech applies it. It is not investment, legal or tax advice. The valuation opinion belongs to the firm and the valuer who approve the report.
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