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Lesson 1 of 9 · 14 min
Disaggregated models: why and how to build a forecast valuation model
A disaggregated model forecasts revenue, expenses, assets and financing separately, so cash flow growth is the result of those assumptions rather than one assumed growth rate, and the forecast cash flows feed a present value or a relative value estimate.
In short
- Base-year models grow one cash flow (dividends, FCF) at assumed rates; a disaggregated valuation model forecasts the financial statements and lets cash flow growth fall out of them.
- Four building blocks: a revenue model, an expense (profit margin) model, an asset model (working capital and long-term assets) and a financing model (debt, equity, cash).
- FCFF = NOPAT − net investment, with . The forecast FCFF goes into a DCF or an EV multiple.
- Disaggregation matters whenever components grow at different rates: a rising payout ratio makes DPS grow faster than EPS; fixed net interest makes net income grow faster than operating profit.
- More line items give a richer narrative but less tractability, more room for model error and more updating; consolidate lines only when they share the same assumptions.
- Uses: estimating intrinsic value, updating it as new information arrives, and what-if / sensitivity analysis.
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