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

The Dark Side of Valuation

Analysts who value declining and distressed firms often find that the tools and approaches that served them adequately with healthy companies fail them. This problem is worse when a sector with a history of financial health becomes troubled, since analysts are slow to let go of old rules of thumb and metrics. This section considers some of the resulting problems in valuing declining and distressed companies.

Autopilot Optimism

At the start of this chapter, we argued that one of the biggest problems that analysts face in valuing declining companies is that they have to fight the optimism that is inherent in valuation. This optimism manifests itself in the valuation of distressed companies in three places:

• Growth rates: ...