skills/dcf-model-builder/references/valuation-judgment.md

# Valuation Judgment

Senior DCF work explains what must be true, not just what the sheet calculates.

Challenge revenue against market growth, share, volume/price, backlog, churn, capacity, and pipeline. Challenge margins against mix, pricing, labor, utilization, input costs, and fixed-cost leverage. Challenge taxes, working capital, capex, D&A, and ROIC for consistency with growth.

Terminal value should not do all the work. If terminal value dominates EV, explain why the explicit period is insufficient or why terminal assumptions are credible.

Downside quality matters: it should pressure revenue, margin, reinvestment, WACC, and terminal value in a coherent way. Avoid a downside that only trims one harmless line.

For public-company strategic alternatives, compare the DCF conclusion to current trading and explain what must be true for value to exceed or fall below the market reference. When a market-referenced screen yields a material premium or discount to current trading, include a controlled numeric reverse DCF rather than only stating the gap: either hold base WACC and terminal-growth assumptions constant while solving for an operating assumption, or hold base operating assumptions constant while solving for WACC or terminal growth. Composite scenario proximity can supplement this analysis but cannot establish market-implied expectations because several drivers move together.

When debt-like items, leases, dilution, awards, repurchases, minority interests, pensions, or other bridge judgments could materially change equity value, show the affected bridge treatment or a focused bridge sensitivity rather than relegating it to a caveat.

If recent quarterly results are available but the model begins with annual forecasts, explain the bridge from the latest reported period to the first forecast year using the most decision-useful business drivers available.

IC lens: state upside/downside asymmetry, source weaknesses, value drivers, debate items, and what diligence would change the conclusion.