Financial valuations are often the end result of a financial modeling exercise, and a good financial analyst will ensure a rigorous approach, grounded in sound knowledge of valuation concepts, is taken to calculating and performing financial valuations when building a financial model.
Some points to consider whenever performing a financial valuation:
- How much can the key assumptions change without altering the decision?
- Are the assumptions realistic? Sales growth, operating margins, capital expenditure, discount rate, etc.
- Be realistic about synergies. Often synergies are manufactured to justify a deal.
- Avoid hockey stick forecasts where a dramatic turnaround for an underperforming company is forecast. This is often not the case in real world business situations,where gradual changes are most common, and sharp turnarounds considered a rare upside.
- What could go wrong that would invalidate the decision? How likely is that to occur?
- Search for mental blindspots such as off-balance sheet items. What if a key executive was ill?
- Avoid short cuts – Use the nine-step DCF process!
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