DCF To Comps Valuation Walkthrough

Reviewed by Fallon Han· Updated 2026-06-01 06:09:27.995

This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.

I'm a second-year economics student at a UK university aiming for a sell-side equity research internship, no visa sponsorship needed. Can you walk me step by step through how a valuation model moves from DCF to peer multiples to a sensitivity table, and where the numbers usually break? I want to understand how one method leads into the next rather than treat them as separate tools.

Absolutely. Think of it as three layers of the same story. First, the DCF gives you an intrinsic view. You forecast revenue, margins, taxes, capex, and working capital to arrive at free cash flow. Then you discount those cash flows back using WACC. The key output is enterprise value, then equity value after subtracting net debt. Next, peer multiples act as a market reality check. If your DCF says the company is worth 14 times forward EBITDA but the peer set trades at 10 times, you need to ask whether your assumptions are too aggressive or whether the company deserves a premium. Finally, the sensitivity table shows how fragile your conclusion is. Usually you flex the WACC and terminal growth in a DCF, or the EBITDA multiple and margin assumptions in a trading comps view. That tells the reader which assumptions matter most. Where numbers break most often: 1. Terminal value dominates the DCF, so a small change in growth or WACC can swing valuation a lot. 2. Working capital and capex assumptions are often too neat and overstate cash generation. 3. Peer comps can be misleading if the companies have different growth, margins, leverage, or accounting treatments. 4. Sensitivity tables can hide bad assumptions if the base case is already unrealistic. A good workflow is: build DCF, sanity-check implied multiple against peers, then show sensitivity to prove you understand the uncertainty.

That helps. On the DCF specifically, when I'm forecasting free cash flow, what should I be careful about so I do not accidentally make the valuation look stronger than it is? I think I might be overdoing the terminal value and underestimating investment needs.

That is a very common mistake, and your instinct is right. For free cash flow, the main traps are: - Revenue growth: do not keep a high growth rate for too long just because the company has momentum now. - EBIT margin: make sure the margin path is believable versus history and peers. If margins expand every year with no explanation, the model is too optimistic. - Capex: underestimating capex is one of the easiest ways to inflate FCF. If the business is asset-heavy or scaling fast, capex should rise with growth. - Working capital: growth usually absorbs cash. If receivables, inventory, or payables are too flat, you may be overstating cash conversion. - Tax rate: use a realistic cash tax rate, not just a statutory rate if the firm has losses or tax shields. The terminal value is usually the biggest issue. Two things matter: 1. The terminal growth rate should normally be conservative and below nominal GDP growth. 2. Terminal value should not become the whole valuation story. If it is driving almost all of enterprise value, that is a warning sign. A good check is to ask: if I cut terminal growth by 50 basis points or raise WACC by 50 basis points, does the valuation collapse? If yes, your model is probably too dependent on terminal assumptions. In an interview, it is strong to say that you used DCF as an intrinsic anchor, but you validated it with market multiples because long-term assumptions are uncertain.

When I move to peer multiples, I get confused about which multiple to choose and how to explain the link back to the DCF. For example, why would I use EV/EBITDA instead of P/E, and how do I know if the DCF is telling a similar story?

Good question. The multiple you use should match the business and the valuation purpose. EV/EBITDA is common for sell-side equity research because it is capital structure neutral and works well for comparing operating performance across firms with different debt levels. It is also useful when depreciation and amortisation differ a lot across peers. P/E is simpler and useful for equity investors, but it can be distorted by leverage, taxes, and one-off items. It is less clean if the companies have very different financing structures. How it connects back to the DCF: - DCF values the business from its future cash flows. - EV/EBITDA gives a market-implied value for the same business based on current trading levels. - You can translate your DCF enterprise value into an implied EV/EBITDA or EV/EBIT multiple for the forecast year. That is the bridge. If your DCF implies a 2026 EV/EBITDA of 16 times but peers trade at 9 times, your assumptions likely need explaining. Either the company has superior growth, better margins, lower risk, or you are too bullish. To make the link convincing, use the same forecast year across all peers, and adjust for differences: - growth profile - margin profile - net debt - accounting differences - one-off events Do not just say the company deserves a premium. Say why. In interviews, analysts like candidates who can connect the driver level to the market multiple level.

I think I understand that. But in the sensitivity table, should I be flexing the same inputs that matter most in the DCF, or should I focus on the outputs that investors actually care about? Also, how do I present it without making it look like I am hiding uncertainty?

You should flex the inputs that drive value the most, and present the outputs investors care about. For a DCF, the classic sensitivity table is WACC versus terminal growth because those two assumptions usually move the valuation the most. That is the cleanest way to show uncertainty around the long-term value. If you want to go one step further, you can add an operating sensitivity on top, such as EBITDA margin or revenue growth, if that is a major investment debate. But do not overload the page. The point is clarity, not quantity. The output should usually be equity value per share or implied upside and downside, because that is what the investment question is really about. In equity research, readers care about target price and rating implications. To avoid looking like you are hiding uncertainty: - Show a base case, plus upside and downside cases. - Keep the assumptions visible. - Use realistic ranges, not absurdly wide ones. - Explain what would need to happen for the stock to move to the bullish or bearish case. A neat way to phrase it is: "The valuation is most sensitive to WACC and terminal growth, which is why I cross-check the DCF against trading comps to ensure the implied multiple remains in line with the peer set." That tells the reader you know the model is assumption-driven and you are not pretending otherwise.

So if I were in an interview and they asked me to walk through a full valuation, how would I link all three pieces quickly without sounding memorised? And what is the most likely place they would push back on my numbers?

A strong interview answer would sound like a chain of logic, not a script. You could say: "I would start with a DCF to estimate intrinsic value from forecast free cash flows, discounting them at WACC and using a conservative terminal growth assumption. Then I would sanity-check the result against trading comps, usually EV/EBITDA or P/E depending on the business, to see whether the implied multiple is supported by the market. Finally, I would show a sensitivity table around WACC and terminal growth, and possibly margin assumptions, to demonstrate how robust the valuation is." That covers the process and the logic. Where they will push back most often: 1. Terminal value assumptions. They may ask why your terminal growth rate is reasonable. 2. Margin assumptions. They will test whether expansion is actually achievable. 3. Peer selection. They may challenge whether your comps are truly comparable. 4. Capex and working capital. They often ask if your FCF conversion is too generous. 5. Multiple choice. They may ask why you chose EV/EBITDA over P/E or vice versa. If pushed, answer in terms of business characteristics, not just formula preference. For example: "I used EV/EBITDA because leverage and D and A differ across peers, so it gives a cleaner operating comparison." That sounds commercially aware. If you want, I can also turn this into a 60-second interview answer you can rehearse.