The sophisticated way of valuing a company is through discounted cash flow. Everybody is talking about it, but how does it work?
On the surface, discounted cash flow is just net present value of future free cash flows.
Free cash flow is the amount of cash company generates after paying for every operational and capital expenditure. It's the amount that can be paid to investors (or reinvested in the company).
Constructing free cash flow model is a complicated and necessary part. One has to account for future capital expenditures, operational activities including revenue growth and possible business challenges.
Afterwards, one has to calculate discount rate. Discount rate is an expected interest/rate of return from the valued company, on its choice relies much of the valuation. One has to choose it with respect to realities, often using some other mathematical model.
Discount rate is always connected to local risk-free rate of return (return on government bonds) and risk premium. Risk premium increases expected and demanded return, based on business sector, size of the company, risk inherent in the company itself and liquidity of its stock.
That is at least based on the findings of Nobel laureates Fama and French, and before them Sharpe, Black, and others.
Illiquid companies (not traded on stock exchange) have thus higher cost of capital. So do small and otherwise riskier ventures.
Discounted cash flow is the most scientific method of valuing companies but is liable to bias. It relies too much on inputs like expected future cash flows and expected (fair) cost of capital as a discount rate.