Valuation isn’t just about plugging numbers into a model—it’s about making judgment calls, interpreting data, and understanding context. That’s why even well-built models can lead to poor outcomes if the logic behind them is flawed.
Mistakes in valuation don’t always come from math errors. They often come from bad assumptions, inconsistent inputs, misused methods, or even overconfidence in the model. For practitioners, learning to recognize and avoid these pitfalls is just as important as knowing how to build a DCF or comp set.
In this article, we’ll look at some of the most common valuation mistakes bankers, analysts, and even experienced professionals make—and how to avoid them by thinking critically, checking context, and staying grounded in market reality.
Mistake #1: Mixing Apples and Oranges in Your Comparables
One of the easiest ways to distort a valuation is by choosing the wrong peer group. Comparable Company Analysis is only useful if the companies you include are genuinely similar. If they differ significantly in size, geography, growth rate, or business model, the multiples you apply will be misleading—no matter how clean your spreadsheet is.
For example, applying a tech company’s EV/Revenue multiple to a capital-intensive manufacturing firm would produce a valuation that looks mathematically fine, but is fundamentally wrong. Similarly, comparing a high-growth emerging market firm to mature Western peers may overlook country risk and capital access differences.
How to avoid it:
Be deliberate in your comps selection. Understand what drives valuation in the sector. Always look beyond surface-level metrics and make sure your peers reflect the same risk-return profile as the company you’re valuing.
Mistake #2: Blindly Trusting the DCF Output
The Discounted Cash Flow model looks rigorous. It’s detailed, built from scratch, and seemingly objective. But DCFs are only as good as the assumptions they’re built on—and those assumptions are often highly optimistic or internally inconsistent.
One of the most common mistakes is plugging in aggressive growth forecasts, assuming smooth margins, or using a low discount rate—then treating the result as gospel. This creates a model that feels precise but is actually fragile. It can also lead to inflated valuations that no buyer or investor would accept.
Another common trap is misapplying the terminal value, which often makes up the majority of the DCF. A small change in terminal growth rate or exit multiple can swing the valuation by tens or hundreds of millions, especially if the discount rate is low.
How to avoid it:
Treat your DCF as a tool for exploring value, not defining it. Always build sensitivity tables to show how changes in WACC, terminal value, or cash flows affect the outcome. Check your model’s realism against market comps or deal precedent ranges. And never use a single DCF output without context.
Mistake #3: Using the Wrong Multiple in a Valuation
Valuation multiples seem simple—EV/EBITDA, P/E, EV/Revenue. But applying the wrong multiple, or applying it inconsistently, is one of the fastest ways to derail a valuation.
A common mistake is using a P/E ratio for a company with volatile earnings or large interest expenses, making the result highly sensitive to capital structure. Or using EV/EBITDA on a company with heavy capital expenditures, where EBIT or free cash flow would paint a more accurate picture of performance.
Another issue arises when practitioners mix multiples across different metrics—applying a revenue multiple from public comps to a company’s projected EBITDA, or using an EV/EBITDA multiple based on LTM data with a forward EBITDA forecast. This leads to mismatches that quietly distort the outcome.
How to avoid it:
Always match the numerator and denominator correctly. Use EV-based multiples when valuing the enterprise and equity-based multiples when focusing on the shareholder value. Know the business well enough to choose the multiple that best reflects its value drivers. And if in doubt, calculate several multiples to triangulate the result.
Mistake #4: Ignoring Capital Structure and Debt-Like Items
Valuation isn’t complete until you move from enterprise value to equity value—and that transition depends entirely on the company’s capital structure. Ignoring debt, excess cash, or off-balance-sheet liabilities can lead to serious mispricing.
A common mistake is subtracting just gross debt without adjusting for cash, which overstates net obligations. Others forget to include debt-like items such as:
- Operating leases (especially under old accounting rules)
- Pension obligations
- Preferred stock
- Contingent liabilities or earnouts
- Unfunded commitments in PE or real estate funds
Each of these affects how much equity value remains after accounting for what the business owes.
How to avoid it:
Carefully review the company’s balance sheet and footnotes. Treat anything that behaves like debt—or creates a future obligation—as part of the capital structure. And when comparing valuation to market cap, ensure that you’ve adjusted for all these items to avoid overstating or understating the true value of the equity.
Closing Thoughts
Valuation mistakes rarely come from broken formulas—they come from rushed assumptions, inconsistent inputs, or a failure to question what the model is really saying. The best practitioners aren’t the ones who build the most complex spreadsheets. They’re the ones who know how to pressure-test their thinking, apply judgment, and communicate what the numbers actually mean.
Avoiding common valuation errors isn’t about memorizing rules. It’s about building habits: double-checking your comps, questioning your growth rates, matching your multiples, and making sure you’re comparing like with like. These habits separate clean, defensible work from numbers that collapse under scrutiny.
In the next article, we’ll look at one of the most misunderstood topics in valuation: why multiples vary so much between sectors, and what those differences actually tell you about risk, growth, and investor expectations.