The wrong Valuation method makes you a bad investor.

Why? 

You cannot use DCF everywhere. 

We need to value business by understanding it’s business phase or cycle 🔁 

1-In the growth phase ( for start-ups) venture capitalist doesn’t have much data on the businesses to value. 

No DCF or Reverse DCF or Valuation multiples can be used.

To value business in the growth phase, we need to make more of an educated guess by looking at TAM (total addressable Market) and Sales.

2- As the company grows and captures market share its margins start to look good which means it is in maturity or stable phase, In that scenario we can use DCF, reverse DCF or valuation multiples to value the business.

3- No investor wants to be part of the declining phase of the business.

“Companies can delay or continue to be in growth phase by introducing new products and services which is a difficult task and very few companies have done ✅it, in past “

Which completely depends on management and its investment philosophy.

Companies having operating leverage have a significant advantage in the long run 🏃‍♂️.

Companies having operating leverage and are self-funded and no longer losing money 💰 at a breakeven point and look overvalued when we look at price to earnings (P/E) or price to free cash flow, but they have a significant upside as they can raise debt and can grow.

Stock-based compensation metric is overlooked by investors, and one should closely look at SBC numbers as it is an expense.

Which cause a lot of suffering for investor why?

An increase in the number of shares outstanding reduces shareholder wealth.

In short, companies buying back shares allows investors' wealth to grow and also boosts confidence in the eyes of shareholders.

SBC isn’t bad but SBC expenses growing far more or close to sales can decrease shareholder wealth.

As per Mr. Warren buffet SBC should be close to 1 %.

I hope you liked the post as I am not a blogger 🙈