ER - Monte Carlo Simulation

Do you use Monte Carlo simulations in your ER work? If so, what are the applications and programming software you normally use? Looking to get a feel for how commonly this and other analytic approaches are for valuation.

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Comments (8)

Oct 23, 2021 - 5:32pm

We are happy with coming up with random target price and tell investors what the implied multiple is. Why get so scientific? 

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Nov 4, 2021 - 10:55am

I've seen it used in a couple of very specific situations: valuing O&G exploration companies (where you are drilling a series of prospects with a rough idea of % chance of success on each and the probabiltiy distribution, plus there is some path dependency) or early stage pharma (similar).

For most companies - what would the point be? You're trying to value a company based on fundamentals, unless you're going to start putting together probability distributions for what the revenue line looks like (which would be garbage in / garbage out) there's nothing to 'simulate'.

Nov 4, 2021 - 12:11pm

Thanks for sharing your thoughts. I was mainly thinking it might apply to the probability of success for a pharma company's trial or for a valuation of an early-stage pharma company.

Nov 4, 2021 - 12:26pm

If you have a very good idea of the % chance of success of each drug in a company's development pipeline at each stage of approval, and there are a few different drugs in the pipeline, then yeah running a Monte Carlo simulation could make some sense. 

I'm not a pharma investor but I'd be amazed if you ever have enough information on the probabilities to make Monte Carlo anything other than garbage in / garbage out.

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Nov 4, 2021 - 10:58am

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