Valuation tools survey: DCF vs Multiples

just out of curiosity, in real life, shops tend to use DCF, Multiples or a mix of both? i understand both of them have their shortcomings and that maybe especially in the Sell Side Multiples are preferred because it's much easier to give a simple answer to the client (given all the inputs a DCF requires).

so which one is it?

 

It depends on the sector, company, and situation. Sometimes I'll use DCF for bull/bear scenario analysis and sometimes I'll do a blended valuation using multiple methodologies. It's like asking what tool do you use from your toolbox: a high powered sand blaster or victor-style torch kit? It depends on the type of job you're trying to get done.

Replacing sand blaster and torch with hammer and screwdriver works as well.

 

My sell-side firm exclusively uses DCF methodologies. It's conceptually and mathematically outstanding. What's your question?

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher
 

Sorry that you feel that way. How do you value corporations?

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher
 

We certainly use common sense in our modeling, too. 1% of revenue wouldn't affect our estimate at all. It's not like we apply zero analytical thinking!

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher
 
Best Response
mrb87:
FVC-DOR:
Sorry that you feel that way. How do you value corporations?

Multiples and common sense. If your call comes down to a 1% change in revenues or WACC, you need to rethink your whole approach

Not to cast doubt on the way you do things or look at companies, but a DCF is simply a tool - it's down to the person to either be stupid (i.e. a tool) about it or actually make good use of the model. Do note that I'm not implying you're a tool, only saying it's a bit unjust to bash the DCF approach - it has its place.

 

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