How do you handle negative cash flows in a DCF?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Negative UFCF in early years is fine – common for growth companies investing heavily. Simply discount them as negative values. The terminal value (when the company matures and generates positive CF) typically compensates. If cash flows are negative even in the terminal period, the company may not be a going concern and DCF may not be appropriate.
WHAT INTERVIEWERS LISTEN FOR
- ✓Discount negative values as is
- ✓Terminal value compensates
- ✓Growth company investment phase
- ✓Going concern assumption needed
COMMON MISTAKES
- ✗Ignore or set to zero
- ✗Assume DCF always works
- ✗No terminal value check
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