Beginner DCF and How to Value
Hello all:
I am currently trying to learn the basics of DCF modeling, but have gone through numerous videos on Youtube and can't seem to grasp it 100%. Are we simply just making bland assumptions? How can we check the sanity of the DCF?
Also, I am particularly interested in how to do Biotech DCF's. In addition, what would be the best way to get a NPV of a company just based on today's earnings?-- Is it still just the traditional DCF way of 5-10 years ahead?
Thank you in advance.
At the end of the day, a DCF is taking projected cash flows and then bringing them back to today's money to value the firm, project, etc. so when you say bland assumptions, I don't know what that means.
You should make your assumptions based on how you expect sales to grow, EBIT or EBITDA margins to expand or contract, or whatever you want to use as a driver. If I understand correctly, it sounds like you are just saying that you look at a company and say "eh, it seems like they'll grow 10% one year and 8% the next." If that's your thinking, then you need to recalibrate.
Valuation and modeling is where art meets science, the qualitative meets the quantitative. To put together a DCF that is worth anything, you have to be able to defend your assumptions. If you tell me that you think Walmart is going to have 15% sales growth in 2016 and 2017, you need to be able to defend that by making a qualitative case of why you think that. It would be really tough to believe that WMT would grow like that but if you could identify some sort of trend or consumer pattern that is oft overlooked but actually makes sense, that makes your DCF a lot better.
You make your assumptions based on your belief of what will happen and your sanity check is being able to make a cogent case for those assumptions.
Here's the problem, and why it's hard to have a sanity check: I could make a DCF give me almost any value and then I could defend those assumptions. If you go into IB, you'll see this firsthand. It's important that you pick good, unbiased assumptions if you are looking to invest based on your model. Thinking about an investment and having a natural bias means you need to really think about what you're projecting and err on the side of caution.
I'm not an expert on biotech but I understand the basic fundamentals, provide more information and I'll see what I can do. I'm not sure what exactly you mean by doing an NPV by today's earnings.
Thanks for your reply. I think I meant to say more abstract assumptions.
In terms of the NPV on today's earnings, I meant to ask , is there a more simple - less complicated way of deriving value of a business/company without an extensive DCF?
Thanks
Multiple-based valuation.
That sounds more appropriate in terms of what I am looking for. Is there a technical term for this? I can't seem to find anything specific on Google for this. Could you possibly guide me through the basics?
https://macabacus.com/valuation/multiples
This should help. Macabacus also has a lot of other tutorials on modeling.
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