How to Think About Valuation (Not Just Calculate It)

Valuation Is Not a Science

Every interview prep resource teaches you how to calculate a DCF, run comps, or build a football field. But in practice, valuation is not arithmetic — it is judgement. Two experienced analysts can value the same company and arrive at numbers 30% apart, and both can be right. The difference is in their assumptions, their view of the future, and how they weigh uncertainty.

The analysts who get promoted are not the ones who build the most technically complex models. They are the ones who can explain why their valuation is what it is — and what would need to change for them to be wrong.

When Trading Comps Mislead

Comps are the most-used valuation method because they are fast and grounded in market reality. But they fail in predictable ways:

• False comparability: Two companies in the same sector can have completely different growth profiles, margins, and risk characteristics. A high-growth SaaS company trading at 15x revenue is not comparable to a mature software business trading at 4x. The comps table looks similar; the businesses are not.
• Market irrationality: If the entire sector is overvalued (or undervalued), your comp-based valuation inherits that distortion. In 2021, using SaaS comps would have valued most companies at 2x their actual worth.
• Small sample sizes: If you have fewer than 5 genuine peers, your median multiple is statistically meaningless. One outlier can move it 20%.

The fix: Never use comps alone. Cross-reference against DCF and precedent transactions. If your comps imply a value significantly above your DCF, ask yourself: is the market seeing something you are missing, or is the market wrong?

When a DCF Is Useless

A DCF is only as good as its assumptions. It becomes unreliable when:

• Cash flows are highly unpredictable: Early-stage companies, cyclical businesses, and companies in distress have cash flows that are too volatile to forecast with confidence.
• Terminal value dominates: If terminal value is more than 85% of your DCF, you are not really doing a cash flow analysis — you are making a perpetuity assumption dressed up as a model.
• The discount rate is wrong: WACC is built on a chain of assumptions (beta, equity risk premium, capital structure weights). Each assumption introduces error. A 1% change in WACC can swing the valuation by 15-20%.

The fix: Always run sensitivity analysis. Present a range, not a point estimate. And never fall in love with your DCF — it is a tool, not truth.

Why Two Analysts Can Disagree by 30%

Consider a mid-market technology company with £50M EBITDA. One analyst values it at 10x (£500M EV). Another values it at 13x (£650M EV). Both are credible:

• Analyst A uses a tighter peer group (enterprise software companies with similar growth) and arrives at a median of 10x. They argue the company's customer concentration is a risk discount.
• Analyst B includes higher-growth SaaS companies in the peer group, adjusts for the company's above-average NRR, and arrives at 13x. They argue the recurring revenue base justifies a premium.

Both methodologies are defensible. The difference is in which peers they selected and how they interpreted the company's characteristics. This is why valuation is judgement, not calculation.

How to Build Better Valuation Judgement

Study deals, not textbooks. When a deal closes at 12x EBITDA, ask: why 12x? What did the buyer see? What premium was paid and why? The more deals you study, the better your instinct for what "reasonable" looks like in different contexts.

Always ask: what would change my mind? If you value a company at £500M, can you articulate the scenario where it is worth £300M? If you cannot, you do not understand the risks — and your valuation is a guess, not an analysis.

Take Your Preparation Further

Download our free Valuation Cheat Sheet for the formulas and frameworks. For all four model templates (DCF, LBO, merger, 3-statement), get the Complete Modelling Toolkit.

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