VOL. XCIV, NO. 247
BOOK BREAKDOWN
NO ADVICE
Advanced · 2025
Valuation: Measuring and Managing the Value of Companies
by Tim Koller, Marc Goedhart, David Wessels, McKinsey & Company Inc. · Evergreen
The practitioner standard for doing valuation with DCF correctly, built around value drivers (ROIC, growth, reinvestment), cost of capital, and clean modeling discipline, plus advanced topics like high-growth and M&A.
Level
Advanced
Strategies
5 types
Frameworks
5 frameworks
Rating
Target Audience
Ideal Reader
- Investors and analysts building serious DCF capability (public equities, private deals, M&A)
- Anyone who wants a repeatable, auditable valuation process (not just a spreadsheet)
- People who already know basic accounting and want to connect financial statements to value creation
- Investors who want to move from 'multiples-only' to fundamentals-first valuation
May Not Suit
- Readers looking for quick stock tips or lightweight heuristics
- People who do not want to build models or touch financial statements
- Anyone who wants a purely academic text (this is practitioner-first)
Investor Fit
| Strategy | Value Investing · Quantitative · Portfolio Management · Special Situations · Growth Investing |
| Time Horizon | Medium-term (1–5 years) · Long-term (5+ years) |
| Asset Focus | Equities · Private Markets · Multi-Asset |
| Math Level | Algebra |
| Prerequisites | Basic accounting literacy (income statement, balance sheet, cash flow statement) · Comfort with discounting / present value · Comfort working in spreadsheets |
Key Learnings
- 1Value is driven by cash flow, ROIC, and reinvestment, not accounting earnings alone
- 2DCF is most reliable when you forecast value drivers (revenue growth, margins, reinvestment) instead of line items mechanically
- 3Terminal value dominates most DCFs, so continuing-value assumptions are central
- 4ROIC and growth are linked through reinvestment; growth is not free
- 5WACC is an input with uncertainty; it is better to be roughly right than precisely wrong
- 6Separate operating assets from non-operating assets and claims when bridging EV to equity value
- 7Multiples are not a valuation method by themselves; they are a cross-check and a way to understand market pricing
- 8Scenario and sensitivity analysis is mandatory; DCF without ranges is fake precision
- 9High-growth valuation requires explicit thinking about scaling, competitive-advantage duration, and the path to steady state
- 10Valuation is as much about decision-making (capital allocation, M&A, portfolio strategy) as it is about price targets
Frameworks (5)
Formulas (11)
Case Studies (3)
High-growth company transitioning to maturity
Rapid growth with uncertain margins and reinvestment needs.
Takeaway
Most valuation error comes from unrealistic fade/terminal assumptions, not from the next one to two years.
Company with meaningful leverage change / recap
Capital structure shifts materially; discount-rate assumptions must match financing reality.
Takeaway
APV or explicit leverage modeling can avoid inconsistent WACC usage.
Acquisition with synergy claims
Synergies are promised but uncertain; timing and one-time costs matter.
Takeaway
Pay only for realizable synergies; many deals fail by overpaying rather than missing minor improvements.
Mental Models
- —Value driver tree (growth, margin, reinvestment, ROIC, cost of capital)
- —Competitive advantage period (duration of ROIC > WACC)
- —Terminal value realism (steady-state assumptions must be internally consistent)
- —DCF as a system: clean operating vs financing separation
- —Reverse DCF / implied expectations (price reveals the market's embedded story)
- —Avoid false precision (ranges, scenarios, and error bars)
Key Terms
No glossary terms documented for this book.
Limitations & Caveats
Keep in mind
- •Heavy approach: requires accounting cleanup and model-building discipline
- •DCF outputs are sensitive to terminal assumptions and discount rates, so ranges are mandatory
- •Less focused on investor psychology; emphasis is valuation mechanics
- •Banks/insurers often need specialized methods beyond standard operating FCFF DCF
- •Early-stage companies without stable unit economics are difficult to value cleanly with traditional DCF
Related Tools
Related Books
Reading Guide
Priority Reading
- Fundamentals of value creation (ROIC vs WACC, growth, reinvestment)
- Forecasting performance using value drivers
- Cost of capital / WACC estimation practices
- Continuing value and terminal assumptions
- High-growth valuation and transition to steady state
- M&A, portfolio strategy, and valuation for decision-making
Optional Sections
- —Detailed accounting normalization examples if you only need conceptual mapping
- —Corporate-managerial sections if your focus is strictly public-equity valuation
Ratings
Concept Tags
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