IBD Interview Question: which industry is not suitable for DCF?
I have thought of this question and come up with the following answer:
1. Financial Industry: Unlevered cash flow does not include interest expense and interest income, which are the main revenue and cost for banks.
2. TMT: usually negative earnings for a long time and uncertainty of cash flow (not really sure if this is the right reasoning?)
Please add any additional industry and any other reason why using DCF is inappropriate for financial industry and TMT?
Thx soo much guys!
You are correct about Financial industry, a DDM would be more appropriate. For TMT you can use DCF in my opinion because only a few companies like SaaS are negative in revenue but majority are positive. TMT- only main difference is mostly different multiples such as EV/Subscribers, EV/Users, EV/Page Views,etc.
Is there any other industry that DCF does not fit?
Not so much an industry, but any early-stage / startup company wouldn't use DCF, just because (as you mentioned earlier), cash flow is so unpredictable.
On that same note, I'm thinking some pharma companies might not also be well suited to DCF either, especially if they're focused on early-stage testing. They'll usually be operating at negative EBIT because it takes forever and a day to get pharmaceuticals through all the stages of trials.
Haven't touched financial models in 3 years, someone please correct me if I'm totally off the mark.
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