DCF vs Comparables: How to Choose the Right Anchor

The Two Main Approaches

When valuing a business, two methods dominate: Discounted Cash Flow (DCF) and Comparable Company Analysis (Comps). Understanding when to use each, and how to triangulate between them, is essential for a defensible valuation.

Discounted Cash Flow (DCF)

How It Works

DCF values a company based on its projected future cash flows, discounted back to present value using an appropriate discount rate.

When to Use DCF

• Company has predictable cash flows or reasonable projections
• You have confidence in growth assumptions
• Business model is established with historical performance
• Company is cash-flow positive or has clear path to profitability

Strengths

• Forward-looking and specific to the company
• Captures value of growth and reinvestment
• Independent of market sentiment
• Forces discipline in assumption-making

Weaknesses

• Highly sensitive to assumptions (discount rate, terminal value)
• Requires reliable projections
• Can produce any number if not grounded in reality

Comparable Company Analysis (Comps)

How It Works

Comps values a company by applying valuation multiples from similar public or private companies to your company's metrics.

When to Use Comps

• Good comparable companies exist (similar size, growth, margins)
• Market is active with recent transactions or trading data
• Company is pre-profit or early-stage (multiples anchor value)
• Need a market-grounded perspective

Strengths

• Based on real market data
• Quick sanity check on intrinsic values
• Easy to explain to stakeholders
• Captures market sentiment and trends

Weaknesses

• Finding truly comparable companies is hard
• Markets can be irrational
• Doesn't capture company-specific factors well

The Triangulation Approach

The best valuations don't rely on a single method. Instead, they triangulate:

1. Run DCF based on management projections
2. Run trading comps using public company multiples
3. Run transaction comps using M&A deal data
4. Compare results and understand differences
5. Weight methods based on reliability and relevance

When methods converge, you have confidence. When they diverge, investigate why.

Next Steps

Need help selecting the right methodology for your valuation? Book a call and we'll walk through the options for your specific situation.