Could someone explain why we need to built a fully fleshed out 3 statement model instead of a DCF model with working capital, capex, d&a and some revenue projections?
I'm trying to understand what the three statement model serves and why it is preferred over a partial model.
I appreciate the help.
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Granularity. What do you need for a DCF? Cash flows. How do you get them? Depending on your method, you might need Net Income, a tax rate, Depreciation, and working capital. How do you get those? Balance sheet, income statement.
Could you just smack x-% growth onto this year's numbers and project from that? Sure. Will it be as useful? I think you can answer that by now.
As well, if you're including an lbo model, you should spread credit statistics to ensure the target does not breach hypothetical covenants.
It's not that hard, too.
A balance sheet is just the accrual / recognition of past and future cash flows presented in a nice format. You're right it isn't necessary, but doing a full model is easier than doing practically half a BS (always like how balance sheet looks like bull shit) anyway when looking for certain metrics.
To the above comment about where you get WC from, historically the cash flow / BS. But your model is your input. You don't "get" those figures from there, but that's where our inputs are represented.
Two other possible reasons: one is the appearance of substance and another is a perceived sense of accuracy. Seriously, though, looking at things from a cookie cutter perspective, whether you do a simple model or a more detailed model, should really depend on the underlying company you are valuing. There are some companies with more stable inputs in which a simpler model can capture well. However, there are companies with weird issues in which more details are necessary.
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