DCF vs Comparable Valuation: Which do Investment Bankers Trust
Introduction to DCF vs Comparable Valuation
When it comes to valuing companies, investment bankers rarely rely on a single formula. Instead, they use a toolkit of methods to cross-check results and build confidence in their numbers. Two of the most popular methods are Discounted Cash Flow (DCF) and Comparable Company Analysis (Comps).
So, which one do bankers actually lean on more—and why?
DCF vs Comparable Valuation: The Basics
Discounted Cash Flow (DCF) looks at a company’s intrinsic value. It projects future cash flows and then discounts them back to today’s value. In short, it’s asking: “What is this company really worth if it keeps performing the way we expect?”
Comparable Valuation (Comps), on the other hand, is market-based. It benchmarks a company against similar businesses by looking at trading multiples like EV/EBITDA or P/E ratios. Think of it as: “What are investors paying for companies like this right now?”
How Bankers Actually Use Them
In real-world deals, bankers don’t pick one method and run with it. They use both—and more.
Here’s how:
Comps often drive the headline pricing in mergers and acquisitions (M&A). Buyers and sellers like to anchor to what the market is already paying.
DCF comes in as a reality check. It provides a long-term, fundamentals-based view. Bankers also rely on DCFs when writing fairness opinions or building internal investment cases.
Together, these methods are plotted on a “football field analysis”—a visual chart that shows valuation ranges across models.
Strengths and Weaknesses
Like any tool, each method shines in certain situations.
When DCF works best:
Stable, predictable cash-flow businesses (e.g., infrastructure, utilities).
Deep dives where precision matters.
Challenges with DCF:
Highly sensitive to assumptions (growth rates, discount rates).
Small tweaks can swing valuations wildly.
When Comps work best:
Fast-moving markets where peer data is readily available.
Benchmarking companies in hot sectors like tech or retail.
Challenges with Comps:
Risk of mispricing if peers are over-/undervalued.
Finding “true” comparables isn’t always easy.
What Bankers Say in Practice
If you talk to practitioners, the message is consistent:
“You triangulate to make sure your DCF makes sense… Both methods have problems, so finding a range that aligns with both gives you more reassurance.”
In simple terms, bankers trust neither method blindly. Comps might dominate day-to-day deal pricing, but DCF remains a powerful anchor for validation.
Conclusion
Here’s the bottom line: bankers don’t rely on DCF or comps—they use both.
Valuation is about triangulation, not single answers. By combining DCF, comparables, and precedent transactions, bankers can defend their numbers, satisfy clients, and negotiate with confidence.
For students, analysts, or anyone exploring investment banking, understanding both DCF and comps is non-negotiable. One gives you a fundamentals-based lens, the other keeps you in tune with the market. Together, they form the backbone of valuation work in banking.