One of the advantage of using Discounted cash flow analysis is - The estimate of company value is based on forecasts of fundamental conditions in the future rather than on current data. May I ask why this one is advantage, is it because current data is not accurate enough ?
Thank you guys.
Using multiples on current financials is fine and all, but imagine if the target is in a high growth industry and that growth slows significantly two or three years out. Using a DCF will give you a better sense of a proper valuation since it’s looking at the cash flows over a longer period of time. Note that a DCF is most effective when the target is at or close to its long-term growth rate so that cash flows are fairly normal/predictable.
Also if you use market data:
1.- Your comps may not be so much comparable to your company.
2.- If they are reasonably comparable to your company, you take the risk of them not truly reflecting close to their intrinsic value by being over/undervalued; so your estimation would be erratic.