Discounted cash flow (DCF)vsComparable-company analysis
The two main valuation methods practitioners triangulate against each other. DCF is intrinsic; comps are relative. Neither is inherently better — both have known blind spots.
The one-sentence difference
DCF discounts a company's projected future cash flows back to today at a risk-adjusted rate — an intrinsic-value approach. Comparable-company analysis applies multiples observed in publicly-traded peers to the company's current metrics — a relative-value approach.
Side-by-side
| Dimension | DCF | Comps |
|---|---|---|
| Foundation | Projected future cash flows + discount rate | Current market pricing of comparable public companies |
| Inputs | Financial forecast, WACC, terminal value | Peer trading multiples, target's current metrics |
| Sensitivity | Extremely sensitive to WACC and terminal-value | Sensitive to comp-set selection |
| Best for | Businesses with predictable cash flows | Businesses in mature markets with public peers |
| Worst for | Cyclical or high-growth businesses with volatile forecasts | Businesses with no genuinely-comparable public peers |
| Time to build | Days to weeks | Hours to a day |
| Buyer/seller framing | Argues intrinsic value | Argues market-clearing price |
| Typical practitioner use | Fairness opinions, board-level valuation memos | Every M&A pitch book, every diligence deck |
When to use which
Building an intrinsic view of value where projections are defensible. Fairness opinions for public-company boards. Contested valuations in litigation.
Full article on Discounted cash flow (DCF) →Everyday M&A pricing conversations. Every buyer's IC memo. Every seller-side pitch of "your business is worth $X because your peers trade at Y×."
Full article on Comparable-company analysis →What they have in common
Both are inputs into a triangulated valuation view. Sophisticated practitioners always build both, plus precedent-transaction analysis, and reconcile the outputs into a defensible range.
Frequently asked
Which method is used in real M&A deals?
Comparable-company analysis (and precedent-transaction analysis, which is a cousin) drives 80%+ of pricing conversations in private-company M&A. DCF is used as a cross-check, especially by buyers modeling long-term returns.
Why can DCF and comps give different answers?
DCF depends on your growth and margin projections plus your discount rate. Comps depend on where the market currently prices peer companies. If the market is at a cyclical high (or low), comps will reflect that; DCF will not. Divergences are informative, not bugs.