Valuation Modeling in Excel
Use Excel to perform valuation modeling
Use Excel to perform valuation modeling
Valuation modeling in Excel may refer to several different types of analysis, including discounted cash flow (DCF), comparable trading multiples, precedent transactions, and ratios such as vertical and horizontal analysis. The above types of analysis may be built from scratch in Excel or may use an existing template/model. This type of work is commonly performed by a wide range of finance professionals.
There are many reasons to perform valuation modeling in Excel, and professionals across a wide range of industries spend a significant amount of time doing this type of work.
Reasons to perform valuation modeling include:
As noted above, there are three main methods (and many more) for valuing a company. Discounted cash flow or DCF analysis is the most detailed method and often the most relied upon approach. Below is a description of how to perform each type of modeling.
In this approach, an analyst or finance professional takes 3-5 years of historical financial information for a business and puts it into Excel. Next, they link the three financial statements together so they are dynamically connected. Following that, assumptions are made about how the business will perform in the future, and those assumptions are used in Excel formulas to create a forecast for the future (typically about five years into the future). Finally, they calculate a terminal value for the business and discount the forecast period and the terminal value back to the present using the company’s weighted average cost of capital (WACC).
For a more detailed explanation, read this step-by-step guide to DCF modeling.
This approach to valuation modeling in Excel is very different than a DCF model. In the Excel method, instead of determining a company’s intrinsic value (as above), an analyst will look at the valuations of other publicly traded companies and compare them to the businesses they wish to value. Common examples of valuation multiples include EV/Revenue, EV/EBITDA, EV/EBIT, Price/Earnings, and Price/Book.
For a more detailed explanation, read this guide to comparable company analysis.
With this third approach to valuation modeling in Excel, an analyst will look at the prices paid for mergers and acquisitions (M&A) of similar businesses that took place in the past. This is also a relative form of valuation, but unlike comparable trading multiples, these transactions include takeover premiums (the value of control) and are based in the past (can quickly become out of date).
For a more detailed explanation, read this guide to precedent transactions.
To perform this type of analysis, finance professionals require many different skills that can often take years of education and experience to master.
The most important skills include:
CFI’s Financial Analyst Certification covers all of these in one intensive online program, while other designations may not cover all skill areas.
There are many jobs and career paths that require the skills of being able to value a company, a business unit, or an investment opportunity in Excel.
Some of the most common jobs include:
The flexibility of Excel is both a blessing and a curse. While larger organizations may attempt to use software to manage their financial modeling, the reality is they often end up reverting back to Excel.
The main reasons Excel is used include:
On this flip side, however, this flexibility means models are prone to errors, inaccurate calculations, and poor practices. Analysts and other finance professionals must ensure that they possess strong Excel modeling skills and a thorough understanding of industry-leading best practices.
Thank you for reading this guide and overview to valuation modeling in Excel. Hopefully, by now, you have a solid understanding of what it is, why it’s used, how it’s performed, and the skills required to carry it out.
To learn more about modeling, check out CFI’s Analyst Certification Program and these additional free resources below:
Learn how to build a financial model in Excel with CFI's Financial Modeling Courses! Build a model from scratch the easy way with step-by-step instruction.
Become a certified Financial Modeling and Valuation Analyst (FMVA)™ by completing CFI’s online financial modeling classes!