Wednesday, August 29, 2007
Doubts re Discounted Cash Flow (DCF) as Valuation Tool
Doubts re Discounted Cash Flow as a Valuation Tool
The discounted cash flow is not an effective valuation tool for commodity (capital-intensive) industries.
The article says that a lot of retrospection is done on the widely accepted valuation tool DCF (discounted cash flow), similar to what PEG (price-earnings to growth) ratio, which was in vogue for valuing technology stocks during the boom of 2000 and 2001, went through in the recent past.
It goes on to add that while there is nothing wrong with the tool itself, its current indiscriminate usage in many sectors like commodities, say in valuing refinery stocks, power generation companies (in this case, depreciation is pass through in nature since the ROEs are capped) etc makes many professionals wary about its use.
Read more from this report @ Business Standard India, Aug 29, 2007
The discounted cash flow is not an effective valuation tool for commodity (capital-intensive) industries.
The article says that a lot of retrospection is done on the widely accepted valuation tool DCF (discounted cash flow), similar to what PEG (price-earnings to growth) ratio, which was in vogue for valuing technology stocks during the boom of 2000 and 2001, went through in the recent past.
It goes on to add that while there is nothing wrong with the tool itself, its current indiscriminate usage in many sectors like commodities, say in valuing refinery stocks, power generation companies (in this case, depreciation is pass through in nature since the ROEs are capped) etc makes many professionals wary about its use.
Read more from this report @ Business Standard India, Aug 29, 2007
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