Which valuation technique focuses on the company's future cash flows?

The focus on a company's future cash flows is a hallmark of discounted cash flow (DCF) analysis. This valuation technique involves estimating the future cash flows that a company is expected to generate and then discounting those cash flows back to their present value using an appropriate discount rate. The DCF method takes into account the time value of money, emphasizing that cash flows received in the future are worth less than cash flows received today.

By evaluating anticipated revenues and expenses, DCF analysis provides a detailed look at the underlying economic potential of a business. This approach is particularly useful for assessing companies with predictable cash flows, as it attempts to provide a more intrinsic value based on the firm's expected financial performance over time.

In contrast, the market approach relies on the valuation of comparable companies, while the cost approach focuses on the asset base of the company. Asset-based valuation emphasizes the company's tangible and intangible assets, rather than forecasting future cash flows. These methods do not capture the potential for growth and operational performance beyond current assets and market comparisons. Thus, DCF analysis stands out for its forward-looking perspective on valuation by emphasizing expected future cash flows.