Valuation in the Age of Volatility: Why Everything About DCF Is Up for Rethink

By Ramesh S. Mahalingam – Ideal Capital Insights

Introduction: Why DCF Valuations Deserve a Second Look

Several years ago, my team and I decided to audit ourselves. We looked back at the Discounted Cash Flow (DCF) models we had carefully built, most of them for clients – solid models by all conventional standards, largely using clients’ own business assumptions – and compared them to how those businesses actually performed a few years down the line.

None of them matched the model.

Most of them underperformed. A very small handful outperformed. Very few lined up with the neat upward-sloping forecasts we had constructed with all the care of a craftsman and the precision of a technician.

This wasn’t a matter of computational error. The Excel formulas held up – in every single case. The logic was clean. The math was correct.

And yet the real world refused to cooperate.

That exercise has stayed with me. Not because it undermined the idea of valuation. But because it exposed the growing gulf between what the DCF claims to do and how it behaves in practice. The deeper problem wasn’t the tool – it was how reflexively, and often superficially, we were using it.

DCF: Brilliant in Theory, Slippery in Practice

DCF is elegant. It ties value to the fundamental economic engine of a business: its ability to generate future cash flows. By discounting those future cash flows back to their present value using an appropriate rate, it grounds valuation in logic and finance theory.

But then it also creates a sense of scientific certainty in a zone where to a large extent judgment belongs. In its classical form, the DCF model rests on three deceptively fragile pillars:

1. The predictability of future cash flows

2. The stability and rationality of the discount rate

3. The reasonableness of long-term growth assumptions, particularly in the terminal value.

   
   

In calm, steady, low-volatility environments, those assumptions feel more defensible. But in the world we live in today, defined as it is by geopolitical instability, technological disruption, inflation volatility, currency upending, and shifting regulatory regimes, they are anything but.

Common Pitfalls in DCF Modeling

I’m not here to argue that DCF is broken. But I am here to argue that our use of it often is.

DCF today suffers from a credibility crisis not because the model is flawed, but because it is so frequently misapplied.

Here are three recurring problems I’ve encountered:

• Superficial modeling: Business forecasts are often weakly justified and pasted into spreadsheets to tick a box.

• Over-reliance on terminal value: This frequently accounts for 50–70% of the total enterprise value, driven by guesswork disguised as projections.

• Controllable outputs: Assumptions are tweaked to meet a valuation goal, sometimes subtly, sometimes not.

It is no surprise, then, that more and decision-makers - investors, CFOs, and boards alike - are increasingly beginning to dismiss DCF as the work of “spreadsheet jockeys,” valuators who treat modeling as a mathematical artifice rather than a grounded exercise in judgment.

Our Approach: How Ideal Capital Applies DCF Differently

We could walk away from DCF. Some already have. But we believe that’s premature.

Instead, we’ve adapted how we use it:

• We never rely on DCF alone. Market multiples (GPC and GTM) are always used to triangulate.

• We use scenario-based valuation. Rather than relying on a single base case, we build upside, downside, and stress-test cases.

• We reframe DCF as one of several lenses, particularly in early-stage or volatile industries.

• We start with the story. Our strongest models begin with understanding the business narrative – growth drivers, operating model, competitive positioning. Only then does DCF follow.

This is what we call narrative-first modeling.

Why DCF Assumptions Are Breaking Down

Assumptions are where most DCF models go astray.

• Forecasts are rarely right in high-volatility settings. The question isn’t if they’ll be wrong – it’s by how much.

• Discount rates (WACC) are extremely sensitive to capital structure, equity risk premiums, interest rate movements, and beta. A discount rate between 9% and 13% can easily shift valuation outcomes by over 40%.

• Terminal value is often a plug figure. In many models, it constitutes the majority of value – which should raise red flags. As a colleague once said, *“Terminal value is just where we park our optimism.”

A Smarter Valuation Framework for Uncertain Times

It’s time to move beyond rigid DCF orthodoxy and toward a more robust, scenario-based valuation framework.

Here’s how we do it at Ideal Capital:

• Narrative-first modeling: We begin with strategic context and let numbers follow.

• Probabilistic inputs: Ranges, sensitivity analysis, and Monte Carlo simulations help model uncertainty more realistically.

• Real Options Valuation (ROV): We apply this to businesses with flexibility to pivot, expand, or defer.

• Iterative modeling: We model inflation, interest rates, and macro assumptions as dynamic, not static, inputs.

A valuation should be seen as a guidepost, not a verdict. It helps frame decision-making by offering a structured perspective, not an absolute answer.

The Limits of Today’s “NextGen” Valuation Themes

Many ask whether AI and ESG will transform valuation practice.

• ESG still lacks consistency in definition and adoption. It remains an important factor, but it doesn’t yet replace core valuation logic.

• AI, for its part, holds promise - but we’re still some distance away from trusting machine-driven valuation without human overlay. Valuation, after all, is context heavy. Until AI can understand strategic nuance, it will remain an assistant, not a replacement.

Is DCF Still Relevant in 2025?

Absolutely – but only when applied with judgment and humility.

Used blindly, DCF will fail. But used thoughtfully, it remains one of the most powerful tools to connect business narrative with value.

The Core Message: Elevate the Thinking Behind the Model

Mindless use of DCF, unchanged since Irving Fisher’s 1907 formulation, risks making it obsolete. The model isn’t broken. But our reliance on it, without challenge or adaptation, is.

We owe it to our clients, investors, and ourselves to apply valuation techniques with greater rigor, creativity, and skepticism. Because in today’s environment, it won’t be the models that define us – it will be the thinking behind them.