Getting valuation right—and writing a plan investors can trust—means matching methods to cash flows, using disciplined assumptions, and presenting decision-ready analysis. This guide distills today’s best practices with links to authoritative sources you can reuse in your models and reports.
The three core valuation lenses you should always triangulate
Discounted cash flow (DCF) with FCFF/FCFE
DCF anchors value in forecast cash flows and a consistent discount rate. In practice, analysts most often combine free-cash-flow models (FCFF/FCFE) with dividend or residual approaches—choose FCFF when capital structure is changing and FCFE when it’s stable. Keep cash-flow definitions and discount rates consistent (equity vs firm; nominal vs real).
Residual income and EVA
Residual income values equity as current book value plus the present value of future residuals, while EVA is a commercial implementation at the enterprise level (NOPAT minus capital charge). These models are powerful where accounting earnings are informative but dividends are unaligned with capacity to pay.
Market multiples (used properly)
Multiples are indispensable for cross-checks. Use forward, enterprise-value multiples with truly comparable peers (similar ROIC/growth) and adjust for non-operating items; do not let a single low-information peer set your price.
Cost of capital and risk: inputs that make or break precision
Estimating WACC and required returns
Estimate the cost of equity via CAPM (or alternatives) and the after-tax cost of debt; then weight by market value to form WACC. Keep currency and inflation consistent with your cash-flow forecasts, and avoid changing WACC across scenarios—reflect uncertainty in the cash flows instead.
Country and currency risk—2025 updates
For non-mature markets, pair currency-consistent DCFs with explicit country risk assessment. Damodaran’s July 2025 update provides current country risk premia and methodology; his 2025 blog illustrates how premiums differ by market (e.g., India vs. Turkey). Cross-check with professional cost-of-capital guides if you need industry benchmarks.
Terminal value without the traps
Keep growth realistic and consistent
Terminal value often dominates DCFs. Use a perpetuity growth rate anchored below long-run nominal GDP of the currency, and ensure your “steady state” capex and margins align with that growth. Consider also an exit-multiple cross-check and report the range.
Sensitivity and scenario hygiene
Because small changes in WACC/TV can swing value, show a clean two-way sensitivity (WACC × terminal growth) and a scenario DCF where operating drivers—not discount rates—do the work.
Data you can trust for stock evaluation
Start with primary filings
Base models on Form 10-K/10-Q (or local equivalents) for segments, risks, MD&A, and footnotes. Use EDGAR and investor-education bulletins to navigate disclosures efficiently.
Add base rates to tame optimism
Temper inside-view narratives with outside-view base rates (growth, margins, drawdowns). Recent work revisits drawdown base rates; Mauboussin’s compilation remains a practical reference for planning assumptions.
Writing business planning reports investors will read
What regulators expect from “management commentary” and strategic reports
In June 2025 the IASB issued a revised Practice Statement on Management Commentary to improve focus on business model, strategy, resources/relationships, risks, KPIs, and prospects—use it as your global benchmark. UK FRC guidance similarly emphasizes a fair, balanced, understandable strategic report tying model, strategy, risks, performance, position, and future prospects.
FP&A in 2025: rolling, driver-based, and AI-assisted
Great plans don’t forecast “oracles”; they deliver transparent, driver-based insights and iterate fast. Leading FP&A practices include rolling forecasts, driver models, and scenario agility—now increasingly augmented by AI.
A step-by-step blueprint you can copy
1) Define valuation perimeter and drivers
Tie revenue to units × price × mix; tie margins to productivity and input costs; map capex/working capital to capacity growth. Document peers and accounting adjustments up front (leases, R&D capitalization if used).
2) Build three linked valuation views
Produce an FCFF DCF, a residual-income model, and a peer-multiple cross-check. Reconcile differences explicitly in your report.
3) Estimate WACC with consistency checks
Select risk-free in model currency, add market (and where appropriate country) equity risk premium, company beta, and after-tax debt cost. Validate against trusted industry/country datasets.
4) Handle terminal value with discipline
Use perpetuity growth with steady-state economics and cross-check an exit multiple from quality peers. Publish a WACC × g table and narrative on steady-state assumptions.
5) Run scenarios and sensitivities
Run base/upside/downside on operating drivers (pricing, volume, margin, capex). Keep WACC fixed; communicate ranges and probabilities. For complex risk, add a Monte Carlo to quantify distributional outcomes.
6) Turn analysis into a decision-ready report
Follow IASB/FRC structure: business model and strategy → resources/relationships → risks and mitigations → KPIs and outlook → valuation conclusions and assumptions appendix.
Example table of contents for a precise planning report
Executive summary (1 page)
Investment thesis, key drivers, valuation range, and top uncertainties.
Company & industry overview
Business model, market structure, peer set, and moat/ROIC path; reference filings and strategy sources.
Operating model & forecasts
Driver tree, unit economics, cohort or segment views where relevant; base-rate sanity checks.
Valuation methods and results
DCF (FCFF/FCFE), residual income/EVA, and multiples—present side-by-side with reconciliation.
Cost of capital appendix
Assumptions, sources, and currency/real-nominal consistency notes.
Scenario & sensitivity analysis
Three cases plus WACC × g grid; optional Monte Carlo distribution.
Risks, controls, and monitoring
Early-warning indicators and triggers that update position sizing or capital allocation.
Common accuracy killers—and simple fixes
Inconsistent currency or inflation
Match the currency and inflation basis of cash flows and discount rates (nominal with nominal; real with real). State this explicitly in your methods section.
Overweight terminal value
If TV exceeds a sensible share of EV, you likely haven’t reached steady state or you’ve set g too high. Show a lower-g case and an exit-multiple cross-check.
“Scenario” by changing WACC
Don’t. Keep WACC fixed and vary operating drivers; it’s standard practice for clean decision analysis.
Thin or cherry-picked comps
Use peer sets matched on ROIC and growth; prefer forward EV-based multiples and adjust for non-operating items.
Frequently asked questions
How many years should my explicit DCF forecast include?
Forecast until economics approach “steady state” (stable growth and returns). Many models use 5–10 years; the key is reaching a sustainable level before applying terminal assumptions.
Should I add a separate country risk premium?
Use a coherent approach and be transparent. Some practitioners add explicit CRP; others prefer scenario DCF with company-specific drivers in emerging markets. Support assumptions with current datasets and explain your rationale.
What belongs in a high-quality planning report?
A narrative tied to drivers and KPIs, material risks, and a reconciled valuation range—aligned to the IASB’s 2025 management-commentary guidance or your local strategic-report rules.
