There are largely 3 valuation methods:
1. Intrinsic Valuation: This method values a company at the sum of the present values of all the free cash flows a company is likely to produce from now to kingdom come. The most famous tools here are the DCF and DDM. VP has threads on both: DCF thread, DDM thread. These models require you to understand the company’s business. the industry’s economics, in an attempt to convert the understanding to projecting a future for the company (So, a well-informed story for the company, supported by numbers grounded in reality). The biggest risk here, is of course, model risk.
2. Multiples/Relative Valuation: Probably the most used and also the most abused valuation model. Ratios like P/E, P/B and P/CF are compared either to the company’s own history or the industry. From there, an ‘Exit P/E, P/B, P/CF’ etc are decided. Then all it takes is a projection of the company’s Earnings, Book Value or Operating Cash Flow. Then, multiplying the former by the latter will provide you with a value. You can see how easy this is to do, but also easy to misuse to fit one’s own whims and fancies. So, this is a double-edged sword. I think someone posted a very simple Multiples valuation excel file somewhere. I forget who. If someone remembers, do help out.
3. Sum of Parts / Liquidation Value: Least used, but possibly the most accurate. The company is valued at how much it would be sold for if it shut down tomorrow. The problem is, it requires a lot of expertise to determine how much each asset of the company is worth. More feasible for manufacturing companies than service companies. I can’t think of any cons in this model, because this is just very close to reality.
There’s no ‘value investing’ or ‘growth investing’ or ‘quality investing’ or ‘momentum investing’, there’s just investing, which is a search for value. What you’re asking for is whether one can predict if a company can create wealth during a specific period and destroy wealth during a specific period. With very few exceptions (Like Commodity companies, whose fortunes are highly linked to one or two factors), it’s impossible to do this.
As a side note, Warren Buffet said that a company which can survive periods of severe inflation is probably a great company. That is to say, the company can pass on the additional costs imposed on it to the customers and live to see another day.