EBIT or Revenue Projections for DCF

Forecasting EBIT instead of revenue for a DCF model is absolutely fine and can be a valid approach, depending on the level of detail and the data you have available. Based on the most helpful WSO content, here’s what you need to know:

1. Revenue vs. EBIT Projections:

   • Revenue projections are more common because they allow for a more granular build-up of assumptions. You can model revenue drivers like unit sales, pricing, or market share, and then layer in cost assumptions to derive EBIT or EBITDA.
   • EBIT projections, on the other hand, are a more direct approach. They skip the detailed revenue and cost breakdowns and focus on the operating profit level. This can simplify the process but may sacrifice some precision.

2. Using EBIT for DCF:

   • If you’re starting with EBIT, you’ll need to adjust it to calculate unlevered free cash flow (UFCF). This involves:
     • Tax-effecting EBIT: $$\text{EBIT} \times (1 - \text{Tax Rate})$$
     • Adding back non-cash expenses like depreciation and amortization (D&A).
     • Subtracting capital expenditures (CapEx) and changes in working capital.
   • This approach is valid and often used when detailed revenue and cost data are unavailable or unnecessary for the analysis.

3. Considerations:

   • While EBIT-based projections are simpler, they may lack the flexibility to model specific growth drivers or cost structures. For example, if Kering’s growth is driven by specific product lines or geographic expansion, revenue projections might better capture these nuances.
   • If you’re using historical data like capital reinvestment rates and return on capital, EBIT projections align well since these metrics are typically derived from operating profit.

4. Practical Tip:

   • If you’re unsure, you can cross-check your EBIT-based projections by comparing them to revenue-based projections or industry benchmarks. This can help validate your assumptions and ensure your model is reasonable.

In summary, forecasting EBIT is perfectly fine for a DCF, especially if it aligns with the data and assumptions you’re working with. Just ensure you’re thorough in adjusting EBIT to calculate UFCF and that your assumptions are consistent with the company’s historical performance and industry trends. Good luck with your finance club application!

Sources: DCF Modeling Course ~ Pre-training text.pdf