The Pros and Cons of Discounted Cash Flow Model

 

Discounted Cash Flow analysis is like the ace-up-the-sleeve trick in equity valuation. The major assumption that money is worth more today than what it would be tomorrow makes the model a go-to tool for all financial analysts and investors. However, despite all its impressive results, DCF models also suffer from major drawbacks and analysts need to keep both the pros and cons in mind to extract the maximum success from the analysis. Just like a simple model can save time, too much dependency can be detrimental.

The pros of a discounted cash flow model

  1. It can be created in MS Excel

You do not need any complicated financial modelling software to create DCF. It is ultimately a cash flow statement of the future that delivers an idea about the present. MS Excel can capture the whole analysis with a simple set of functions and formulas.

  1. Intrinsic value is the outcome

In other words, you get an idea about how much you are to invest today to receive a particular return in the future. All the results are solid numbers with no scope for ranges. The returned intrinsic values in equity valuation, thus, simplify decision making and remove the requirement to compare companies.

  1. Captures business expectations

Discounted Cash Flow modelling starts with a few assumptions. And these assumptions encapsulate crucial business features like the history of growth, balance sheet strength, cash flow, prevailing market conditions and so on. Hence, you will not need to add further parameters on the end result as the major expectations are already captured by the model.

  1. Suitable for more analyses

Along with equity valuation, you can also use DCF to calculate the internal rate of return, other investment opportunities and potential of proposed mergers and acquisitions. In short, DCF modelling is a diverse skill to have.

The cons of DCF analysis

  1. Precision sensitive to assumptions

The outcome of a discounted cash flow model is as good as the assumptions you make. A small error here can return inflated intrinsic numbers. Plus, the sample size of your historical data may also cause large swings and often requires 50 years’ worth of information.

  1. Prone to overcomplication

DCF modelling in the inexpert hands can quickly turn into a perfect financial model that predicts very precisely. But the sheer number of assumptions combined with the term of the investment may make the Excel sheets a herculean task to maintain.

  1. Isolated picture

Equity valuation needs to take other businesses into account to adequately streamline resources. DCF has no scope of comparisons. The isolated picture may also create biases and lead to loopholes in decision-making.

Hence, although powerful, a discounted cash flow model demands a trained mind. A reputed online course can equip you with the steering techniques and transform you into a financial analyst with DCF expertise. Staying away from the cons requires rigorous practice and that is what you learn in good technical online courses.

What is Excel and The Advantages of Online Excel Courses

Microsoft Excel is one of the best applications available for generating spreadsheets. It has wide-ranging capabilities and is used across the world for data analysis, financial reports, and maintaining dashboards. The software was introduced in 1987 and since then has seen many upgrades. Microsoft Excel has become the most popular software used by businesses, professionals, homes, and schools.

No matter if you are a homemaker, a student or a CEO Excel Training Courses is a must for all. Many people are aware of the basic use of Excel but do not know that there are innumerable advanced ways of using Excel. Learning even a few of the advanced techniques of Excel can offer the user several powerful advantages. One can easily learn everything that Excel has to offer online.

Let’s find out a few advantages of online Excel Course:

1.      Increased Efficiency: Whether you are an employee or a student increased efficiency in sorting, analyzing, and storing information is always an added advantage. An employee who can organize and analyze data better can save a substantial amount of time and work smart.

2.      Efficient Planning: With Excel training courses learn how to analyze and identify patterns in large data. Faster analysis of data allows workers to easily summarize statistics for presentations and meetings. This leads to efficient planning and decisions.

3.      Better Jobs: With advanced excel training it’s easy to get into jobs like finance analyst, data analyst, data journalist, accountant, and even business planners.

4.      Increased Value: With online Excel classes learn skills that not many people know. As a result, you will have a competence that will make you unique from other employees, and this will, of course, be more appealing to employers.

Everyone is aware of Excel is a tool that is extensively used by finance professionals and also by sales and marketing professionals.  There are several other professions too that can gain immensely with Excel. Here are a few examples of the same.

Teachers. Gone are the days when a teacher could just go take a class, check a few copies and be back home to enjoy peace. Teachers are nowadays multi-task. They are responsible for creating and tracking lesson plans. School events, fairs, and trips are planned by them. Learning advanced Excel skills can make it simple and easy to track various details involved with these plans including student’s grades, event expenses, and seating plans.

Journalists.  These are the people who often need to accumulate large amounts of data or relevant stories, phone numbers of people, and the smallest of information.  Everything is vital for them. Advanced Excel skills make storing, organizing, and later analyzing the data very easy.

Photographers. With many leads and people to follow up for shoots and payments Excel training course can help in tracking information and leads with ease.

Doctors. Store all case studies in one sheet and take a look whenever needed. Keep a track of patients list and finances. The advantages are many.

This list can just go on and on for lawyers, writers, performers, students- Excel has something unique to offers for everyone.

No matter what or at what stage of a profession are you in there is always much to be gained with an online Excel Course offered by Skillfin Learning.