When would you not use a DCF in a valuation?
Answer
Remember, DCFs are fully reliant on predictable and stable cash flows.
If a company has unstable or unpredictable cash flows: BioTech / Software startups
If debt and working capital have a different role than usual: Banks / FIs
Why this matters to bankers
DCFs are common and a go-to method for valuing a business. However, there are certain edge cases and it’s key to understand when a DCF would not be reliable. Don’t be the kid that thinks it’s a trick question.