How Our Models Work

Complete guide to IntrinsiclyIQ's DCF and Comparable Company Analysis methodologies

How Our DCF Model Works

Our Discounted Cash Flow (DCF) model uses institutional-grade methodology to calculate intrinsic value. Here's exactly how it works:

1 Data Collection & Optimization

Premium Financial Data Sources

We use our market data API and optimized CompanyDataService to fetch comprehensive financial data:

  • 10+ years of historical financial statements
  • Real-time market data and current pricing
  • Balance sheet, income statement, and cash flow data
  • Market metrics: beta, shares outstanding, debt levels

2 WACC Calculation (Discount Rate)

Our WACC calculation uses the Capital Asset Pricing Model (CAPM) with live market data:

Cost of Equity Formula:
Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
Where:
  • Risk-Free Rate: Live 10-Year US Treasury yield
  • Beta: Company's beta from financial data
  • Equity Risk Premium: Damodaran's current ERP
Cost of Debt:

Calculated from actual financial statements:

Cost of Debt = Interest Expense / Total Debt
WACC Formula:
WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 - Tax Rate))

3 Free Cash Flow Projections

Unlevered Free Cash Flow (UFCF) Formula:
UFCF = NOPAT + Depreciation - CapEx - Change in Working Capital
Components Breakdown:
  • NOPAT: Net Operating Profit After Tax = Operating Income × (1 - Tax Rate)
  • Depreciation: Non-cash expense added back
  • CapEx: Capital expenditures (growth investments)
  • Working Capital Change: Change in net working capital requirements
Smart Defaults

Our model calculates historical averages for CapEx %, working capital changes, and tax rates from 10+ years of data, ensuring realistic projections.

Projection Logic:
  1. Project revenue growth for each year
  2. Apply operating margin to get operating income
  3. Calculate NOPAT using company's effective tax rate
  4. Add back depreciation and subtract CapEx and working capital changes
  5. Repeat for each projection year (typically 5-10 years)

4 Terminal Value Calculation

Perpetuity Growth Model:
Terminal Value = (Final Year FCF × (1 + Terminal Growth Rate)) / (WACC - Terminal Growth Rate)

This assumes the company will grow at a sustainable rate forever after the projection period.

Terminal Growth Assumptions
  • Typically set between 2-4%
  • Should not exceed long-term GDP growth
  • Represents mature company growth rate

5 Present Value & Intrinsic Value Calculation

Discount to Present Value:
PV = FCF / (1 + WACC)^year
Enterprise Value:
EV = Sum of PV of FCFs + PV of Terminal Value
Equity Value:
Equity Value = EV - Net Debt + Cash
Final Intrinsic Value Per Share:
Intrinsic Value = Equity Value / Shares Outstanding
Investment Decision:
  • Upside: Current price < Intrinsic value → Potentially undervalued
  • Downside: Current price > Intrinsic value → Potentially overvalued
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How Our Comps Model Works

Our Comparable Company Analysis (Comps) model identifies peer companies and applies market multiples to determine relative valuation. Here's our methodology:

1 Peer Company Identification

Intelligent Peer Selection Criteria:
  1. Same Sector: Companies must operate in the same business sector
  2. Similar Industry: Bonus scoring for companies in the same sub-industry
  3. Market Cap Range: Between 20% and 500% of target company's market cap
  4. Similarity Scoring: Algorithm ranks peers by market cap similarity
Manual Override

You can also manually select specific peer companies if you prefer custom comparisons over our automated selection.

Market Cap Similarity Formula:
Similarity Score = 1.0 - min(|Peer Market Cap - Target Market Cap| / Target Market Cap, 1.0)

2 Valuation Multiple Calculations

We Calculate 5 Key Valuation Multiples:
Price/Earnings (P/E)
P/E = Market Cap / Net Income Shows what investors pay per dollar of earnings
EV/EBITDA
EV/EBITDA = Enterprise Value / EBITDA Capital structure neutral multiple
Price/Sales (P/S)
P/S = Market Cap / Revenue Revenue-based valuation
Price/Book (P/B)
P/B = Market Cap / Book Value Asset-based valuation
EV/Revenue
EV/Revenue = Enterprise Value / Revenue Enterprise revenue multiple

3 Peer Group Statistical Analysis

For each multiple, we calculate:
  • Median: Middle value (most reliable for valuation)
  • Mean (Average): Mathematical average of all peers
  • Minimum: Lowest multiple in peer group
  • Maximum: Highest multiple in peer group

This gives you a complete picture of how the market values similar companies.

Statistical Reliability

We use the median for valuations because it's less affected by outliers than the mean, providing more reliable estimates.

4 Target Company Valuation

Applying Peer Multiples to Target Company:
Valuation Formulas:
  • P/E Valuation = Target Net Income × Peer Median P/E
  • EV/EBITDA Valuation = Target EBITDA × Peer Median EV/EBITDA
  • P/S Valuation = Target Revenue × Peer Median P/S
  • P/B Valuation = Target Book Value × Peer Median P/B
  • EV/Revenue Valuation = Target Revenue × Peer Median EV/Revenue
Multiple Validation

We only calculate valuations for multiples where the target company has positive fundamentals (e.g., positive earnings for P/E).

This ensures meaningful comparisons and avoids misleading negative or infinite multiples.

Valuation Range Analysis:

Each multiple provides a different valuation perspective:

  • P/E: Earnings-based value (profitability focus)
  • EV/EBITDA: Operating performance (cash generation focus)
  • P/S: Revenue multiple (growth/scale focus)
  • P/B: Asset-based value (book value focus)
  • EV/Revenue: Enterprise revenue value (total business focus)
Final Assessment: Compare the range of valuations to current market price to identify potential over/undervaluation relative to peer companies.
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