The Dangers of Blue-Sky Thinking

Great read on the importance of DCF ( Discounted Cash Flow) Models!

Wall Street and Beyond

Many investors I know reject the use of DCFs as a tool to value companies. The refrain I hear most often is “Well, a DCF is only as good as your assumptions – it’s too easy to manipulate the price target.” This is a truism, but that doesn’t make DCF a pointless exercise. It just means you need to spend time understanding whether the assumptions are reasonable ones.  Unfortunately the reason that many investors dismiss DCF methodology has more to do with laziness than anything else

In the wrong hands of course, a DCF can be a dangerous weapon. This is why you need to exercise caution, particularly when a DCF is used to determine a price target that isn’t justified on any other metrics. As a rule of thumb, where the current year P/E is over 20 you should maintain a higher level of skepticism.

Of all the assumptions…

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