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Choose the Right Analysis Method

Not all valuation methods work for every company. Answer 2 quick questions to find your perfect match.

1
Profitability
2
Cash Flow
3
Result

Is the company profitable?

Has the company had positive net income for the past 5+ years?

Check the company's income statement for net income trends over the past 5 years

Quick Decision Matrix

Company Characteristic
Traditional DCF
FCF Analysis
Revenue-Multiple
Profitable + Mature (5+ years)
Profitable + High Growth
Positive FCF, Negative Earnings
Negative FCF, Negative Earnings
High Stock-Based Compensation
Pays Dividends
Highly Cyclical Business
Best Choice
Works (with caveats)
Not Recommended

How Companies Evolve Through Stages

Most growth companies progress through these stages, requiring different analysis methods at each phase

Stage 1: Early Growth

Revenue-Multiple MCP

  • • Burning cash to acquire customers
  • • Negative FCF, negative earnings
  • • Only revenue is positive
  • • Valuation: Peer multiples + scenarios
Example: CHYM today

Stage 2: Scaling Profitably

FCF (Free Cash Flow) Analysis

  • • Positive FCF from operations
  • • Still showing accounting losses
  • • Reinvesting heavily in growth
  • • Valuation: FCF-based valuation
Example: BULL today

Stage 3: Mature & Profitable

Traditional DCF

  • • Consistent positive earnings
  • • Stable margins
  • • Often paying dividends
  • • Valuation: Traditional DCF
Example: AAPL today

Pro Tip: For companies in transition (like HOOD), run all three methods and compare results for a comprehensive valuation range!

Red Flags to Watch For

Universal Red Flags (Any Method)

  • • Declining gross margins (pricing pressure)
  • • Revenue growth decelerating rapidly
  • • Increasing days sales outstanding (DSO)
  • • Heavy customer concentration (1-2 clients = 50%+ revenue)
  • • Frequent "one-time" charges quarter after quarter

FCF-Specific Red Flags

  • • FCF declining while revenue growing (working capital issues)
  • • FCF consistently less than Net Income (quality of earnings problem)
  • • Rising CapEx as % of revenue (capital intensity increasing)
  • • Negative cash conversion cycle trends

Revenue-Multiple Red Flags

  • • Trading at premium to peers without superior growth
  • • Cash runway less than 4 quarters (dilution risk)
  • • Gross margins declining (unit economics worsening)
  • • QoQ revenue growth decelerating

When Multiple Methods Disagree

  • • Use the lowest valuation as your conservative floor
  • • Use the median as most likely fair value
  • • Large divergence indicates business in transition
  • • Weight more recent financials more heavily

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