DCF Help
How do you do a DCF for a company that has negative earnings? Wouldn't you just focus more on comps analysis & PT instead of DCF in this case?
Also as a follow up question, when would you not use a DCF?
Trending Content - Investment Banking Forum
| +255 | Investment Banks Ranked By Your Divorced Blue Collared Uncle | 22 | 16h |
| +148 | UBS Exits 2026 | 39 | 1d |
| +103 | Work life balance = highly overrated | 39 | 1h |
| +74 | Congrats on the ROs. I Still Don’t Know Which One You Were | 8 | 2d |
| +42 | Did not get a return offer due to headcount, but happy to move on. | 8 | 2d |
| +40 | IB RO Discussion | 8 | 1d |
| +38 | girl who rejected/ghosted me messaged asking for IBD job | 22 | 58m |
| +34 | I don’t think investment banking is the way for me anymore | 29 | 5h |
| +30 | Case studies in banking interviews? | 3 | 6h |
| +29 | Getting a BB job just for brand name? | 5 | 1d |
Career Resources
Yes, you are right— you would not use a DCF in this case because positive cash flows (the very things you are using to estimate value) are non-existent. I guess you could make a case for running a DCF on a pre-earnings company if you were extremely confident in positive earnings predictions in the years ahead... but that’s definitely a stretch and I’m not sure anyone would give it much weight. Much better to use comps and PTs.
You typically don’t use a DCF for pre-earnings companies (as discussed) or companies that have very volatile earnings that are hard to predict with any level of accuracy.
DCF: The issue isn't negative earnings so much as the FCF being unstable. Note that you may have negative earnings with positive cash flows but this still insufficient. Negative earnings implies that company isn't stable yet. Negative earnings aren't sustainable long-term so you know the company is either still in growth stage or distressed/on a downturn. Either way, the company's FCF will be unstable and you cannot use the perpetuity growth method to conclude a DCF valuation until the company has stabilized its growth.
You'd focus on comps multiples off of stabilized positive values - for TEV, is EBITDA positive? If not, use a sales multiple.
Earnings may be negative but what about FCF? You could try P/FCF. Lots of tech SaaS are earnings negative but FCF positive and you could slap on 20-30x multiple to get an equity valuation.
You can still do a DCF with negative earnings, this happens all the time for clinical-stage life sciences companies. You need to push out your time horizon.
Can you explain in more detail how you would do so? I am relatively new to the valuation methodologies?
Autem voluptatibus officiis eaque labore. Qui assumenda aut et nihil. Illum hic voluptatum aperiam quia et molestiae iusto asperiores.
Velit minima iure sequi non numquam quas eligendi. Voluptas voluptas laboriosam cum voluptatibus.
A ab blanditiis dicta velit. Id quas iste et repellat. Reiciendis dolorem ipsum adipisci delectus ad enim occaecati culpa. Et et ullam saepe vitae fugit. Provident ex aut adipisci id earum. Est delectus ullam et neque reiciendis animi enim. Et id repellat nobis voluptatem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...