The Daily Technical #59: Contrast the discounted cash flow (DCF) approach to the trading comps approach.

Good morning. Welcome to the 59th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What is CAGR and how do you calculate it?

The compound annual growth rate ("CAGR") is the rate of return required for an investment to grow from its beginning balance to its ending balance. Put another way, CAGR is the annualized average growth rate.

CAGR = (Ending Value / Beginning Value) 1 / t – 1

Common Mistakes

1. Assuming that CAGR accounts for volatile or uneven growth rates over time. CAGR offers a smoothed annual growth rate as if the investment had grown at a steady pace, which may not reflect real volatility.

2. Forgetting to convert the decimal to a percentage. After calculating the CAGR, remember to multiply by 100 to express it accurately as a percentage.

TL;DR

• CAGR is the annualized average rate of return for an investment, depicting its growth from start to finish over a set period.

• CAGR = (Ending Value / Beginning Value) 1 / t – 1

TODAY’S QUESTION
Contrast the discounted cash flow (DCF) approach to the trading comps approach.

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THAT’S A WRAP
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Mike Lukasevicz
Founder @ HirePrep