“DCF is much more than simply an explicit forecast plus terminal value,” argue the authors at The Footnotes Analyst in their most recent article. And, in “Analytical Insights From DCF Value Analysis,” they include a free model valuers can use to take their “DCF calculation a step further and analyse the resulting value into four components.”
Their objective is to show that “there is more to DCF than simply an explicit forecast and a terminal value and that, by analysing value in this alternative way, additional insights can be obtained.” Their model derives a DCF enterprise value based on post-tax operating profit, or net operating profit after tax (NOPAT). This aligns with income approach best practices in the valuation profession, though earnings and PE ratio analyses are still common.
The authors remind financial experts that both exceptional income and expenses must be normalised and that NOPAT is often artificially depressed if large intangible asset investments are not capitalised.
As always, the authors include an explanation of the model and the underlying math in “Interactive Model: Target Enterprise Value Multiples.”
Their four components of value each represent the value contribution from different periods. The four components are:
- Current operating value;
- Short-term growth value;
- Medium-term investment value; and
- Long-term franchise value.