The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Remedies

It is difficult for analysts to keep their views on the macro economy out of their individual company valuations. To prevent these views from hijacking valuations, we suggest that you follow a few simple rules:

• Make implicit assumptions explicit: As noted in the preceding section, many valuations make implicit assumptions about growth, inflation, and exchange rates. While these implicit assumptions may be perfectly reasonable, the only way to tell is to make them explicit. For instance, breaking the nominal growth in revenues into growth in the units sold (real growth) and expected inflation allows us to judge whether the inflation assumptions are reasonable, given both general inflation rates and the pricing power a firm possesses. ...