The identities that hold a valuation together.
A valuation is not a list of independent guesses. Growth, reinvestment, returns on capital and the multiples a company trades at are bound to one another by accounting identities and by the discounted cash flow model itself. Fix three of them and the fourth is no longer yours to choose. This page lays out those relationships, one at a time, with a live calculator and a pointer to where Damodaran derives each one — so you can check whether the numbers in your equity research report actually hang together.
One modelling choice runs through the whole page: wherever a value or an intrinsic multiple appears, the firm is priced as if it were already in stable growth — a single-stage perpetuity on next year's cash flow, with no high-growth phase in front of it. That is the cleanest setting for watching the identities work, and it is why a company with real growth ahead of it should trade above the intrinsic multiples shown here. A real report puts an explicit forecast period in front of the terminal year — and that terminal year must still obey every identity in family 5.
Your estimates
Every card on this page reads from these numbers. Currency units are arbitrary — use the same ones throughout (millions, thousands, whatever your report uses). Balance-sheet items should be measured at the start of the year whose earnings you enter, which is how Damodaran computes accounting returns.
What looks off
Every identity card tests itself against your inputs. Anything that fails, strains, or quietly assumes something heroic shows up here. None of these are errors in the arithmetic sense — they are places where your report needs a sentence of justification.
The chain, end to end
The spine of the valuation as one moving piece. Each row solves for exactly one quantity, so a slider change flows strictly downstream: margins and turnover set the return on capital, reinvestment turns that return into growth, the spread over the cost of capital prices it, and the bridge divides it into a value per share. Revenues and the bridge items (cash, debt, other claims, options, shares, price) come from your estimates above. One simplification to keep in mind: the chain values the firm as a single stable-growth stage — one phase, in perpetuity, with no high-growth period in front of it — earning the return on capital the sliders describe, forever. The Terminal ROIC field in your estimates is deliberately not used on this tab; only the identity cards read it. That is also why the chain's value of operations can differ from card 5.1's terminal value, which is computed at that terminal return instead.
How to use this in a report
- Estimate growth, do not assume it. If your report projects earnings growth of 12% a year, some combination of reinvestment and return on capital has to deliver it. State that combination. An assumed growth rate with no reinvestment behind it is the single most common way a DCF overstates value.
- Make the terminal year internally consistent. In perpetuity, reinvestment is g/ROIC — not whatever the last forecast year happened to be. Get this wrong and the terminal value, which is usually most of your value, is wrong with it.
- Ask what the market is assuming. Invert the model: what growth rate, or return on equity, does today's price require? Comparing that with what the company has actually earned is often a stronger argument than your point estimate of value.
- Cross-check your DCF against your multiples. The intrinsic multiples on this page come from the same inputs as your DCF. If your DCF says the firm is worth 12× earnings and you then value it off a peer group at 25×, one of the two stories is wrong and the report has to say which.
- Excess returns are the whole game. When ROIC equals the cost of capital, growth creates no value at all — the terminal value collapses to EBIT(1−t)/WACC regardless of g. So any argument for growth is really an argument about competitive advantage, and it belongs in the narrative, not just the spreadsheet.
All references are to Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 4th edition (Wiley).