Would it makes sense to have a very detailed P&L model within my DCF but just have historical data for the cash flow and balance sheet? Obviously solvency and cash mgmt is important but I don't see an increased level of detail needed to project CF+BS when that doesn't drive much value in identifying long-term investments. Am I incorrect to do this?
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How are you capturing the capital intensity and forward roic? These also matter for value outside of rev growth + margin expansion.
how are you doing a DCF without having the accurate items to project cash flow, some of which rely on BS/CF statements? You don't need to do a fully detailed one but just a simple one should be fine too I guess if you really want to skip it
Totally understand this, in my models I do have a detailed projection in BS+CF to get a ROIC and margin expansion but I've heard some people don't project them out which never made sense to me. Thank you for confirming my suspicions.
Depends on the sector but I’m a big cash gen guy so wild to think about not building out a thoughtful CF projection. I’m not sure I’ve made money by projecting a BS but def have by getting CF right. BS just hit the high points and hold the stuff that doesn’t really matter flat or tied to an appropriate metric.
At the end of the day we are trying to think about what the "economic earning power" of a company is. sometimes, the IS will be the best representation of this. sometimes, the CFS will. sometimes it will be a combination. There are many cases where net income or ebit are not good representations of a company's economic earning power. this is why i think it's important to model both.
I've seen people start with the sellside BS / CFS and then not update it until they got fired after 4-8 quarters.
EDIT: Thanks for the "funny" SBs. I am serious, though 😆😂
Income statement for short/medium term trading. Cash flow statement for truly understanding the mechanics. Unless you are playing small/mid-sized companies with risk of going under, there's no point in projecting cash
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