Discounted Cash Flow

[TazTheLaz]

Hello EliteTrader,

I can already predict that 90% of you will scroll past this, because this is FA and not TA.

However, I have a question, which types of companies does DCF apply to, and which ones do DCF not apply to?

I am currently analyzing an investment service firm (NOT A BANK), however people say that I shouldn't use DCF for any financial institution, including ones that have 'normal' balance sheets and such.

Is there any reason I should NOT use DCF on an investment service firm?

The company is SEI Investments, if anyone was wondering.

 

[USDJPY]

Hello EliteTrader,

I can already predict that 90% of you will scroll past this, because this is FA and not TA.

However, I have a question, which types of companies does DCF apply to, and which ones do DCF not apply to?

I am currently analyzing an investment service firm (NOT A BANK), however people say that I shouldn't use DCF for any financial institution, including ones that have 'normal' balance sheets and such.

Is there any reason I should NOT use DCF on an investment service firm?

The company is SEI Investments, if anyone was wondering.

I would value you it on current cash flows so you don’t need to come up with a discount rate. The future is unknown and discount rates can fluctuate widely. Focus more on the payback period, if that makes any sense. How long until the cash flows get you back to even until you own the company for free.

 

[MrMuppet]

Actually a great question.

You don't use DCF for banks because the input as well as the output is money. There are other models such as DDM.

When it comes to financial service providers, things become rather tricky especially when they have a diversified portfolio of products. SEI offers asset management as well as technology and operations outsourcing.

For their services you could use DCF, for the asset management part...not really sure if it makes sense to use any fundamental analysis here. Asset managers are usually evaluated using VaR

 

[The_Krakenite]

Unfortunately, VaR is a very flawed concept. It's been blamed for many disasters.

 

[MrMuppet]

Unfortunately, VaR is a very flawed concept. It's been blamed for many disasters.

true, but you have to evaluate an asset manager like a risk asset based on volatility adjusted returns as well as default- and tail risk

 

[longandshort]

Use a residual income model (RIM) or DDM for banks. For service providers you can use a DCF.

 

[TazTheLaz]

Use a residual income model (RIM) or DDM for banks. For service providers you can use a DCF.

Which RIM model should I use?

Also, if possible, which one do you use?

 

[longandshort]

Which RIM model should I use?

Also, if possible, which one do you use?

RIM just means the actual income from business vs free cash flow. Net income is a good start.