Lesson 8 of 8
When not to build one
A lender, a company with no positive cash flow and a company in restructuring all defeat the model. What to use instead, and why no answer is an answer.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- A DCF needs a cash flow that is positive, forecastable, and separable from financing. Three large groups of companies fail one of those tests.
- For a deposit-taking lender the borrowing is the raw material, so no blended cost of capital means anything and none is published.
- Refusing to produce a number is a result. What replaces it is a no-growth anchor, an asset floor, or the model run backwards.
The model is obedient, which is the problem. It will value a bank, a company that has never earned a profit, and a company two weeks from a restructuring, and the outputs will look identical in a spreadsheet.
Why a cost of capital is not published, by reason
- No debt line read from the filing · unknown, not zero1,940 listings
- A deposit-taking lender274 listings
- Filed interest is not a cost of the debt162 listings
A lender
For an ordinary company, debt is capital and interest is its price. For a bank the deposits are the raw material the business buys and sells, so interest over borrowings is a cost of goods rather than a cost of capital. ValueScreener publishes no weighted average cost of capital for one, and says so with a reason rather than printing a plausible number.
The same logic removes the cash flow. Changes in loans and deposits swamp anything that looks like free cash flow, and a bank cannot be separated from its financing because its financing is the business. The replacements are equity-side: what the equity earns, what it is worth on the books, and what that book value is actually made of.
No positive cash flow to start from
A two-stage model grows a base. If the base is negative the model compounds a loss and returns a number anyway; if the base is zero the model returns zero. ValueScreener's workbench refuses a starting cash flow of exactly zero, which catches the second case and not the first.
Where the loss is temporary and the business is otherwise readable, the honest move is to forecast the path to a positive margin explicitly, and to state that the margin has never been earned. Where it is not, the model is not the tool.
A company whose numbers disagree with each other
A gap like that is not a reason to pick the flattering number. It is the finding: the cash flow is currently arriving from assets that are being consumed faster than they are being replaced, and a forecast has to say what happens when that stops.
A company in restructuring
A discounted cash flow prices a going concern. A company whose capital structure is about to be rewritten is not one: the claim you hold may not exist after the plan, and the share count on the other side is usually decided by creditors rather than by cash flow.
What replaces it, and what to write down
Three replacements, in order of how little they assume. The no-growth value, which is operating profit after tax over the cost of capital and needs no forecast at all. An asset floor, which needs a balance sheet and a haircut. The model run backwards, which takes the price as given and asks what it already assumes.
One thing not to do is quietly lower the standard. In ValueScreener a margin of safety exists only against a value the investor set: a thesis target price or a saved DCF, and nothing else. If neither exists, no margin is shown. That is the same discipline at product level as refusing to build the model: a comparison with a value nobody stated is not a margin, it is a decoration.
Check yourself
Why is no weighted average cost of capital published for a deposit-taking lender?
- Banks are too complex to value
- Its interest is mostly paid on deposits, which are raw material rather than capital
- Regulators do not allow it
Show the answer
Answer: B.
Interest over borrowings for a bank measures the cost of its product, not the cost of financing the business, so the blended rate would not mean what the label says.A company files an operating loss and positive free cash flow in the same year. What follows?
- The cash flow figure is the reliable one and should be used
- The gap is the finding, and a forecast has to explain what happens when the non-cash charges stop covering it
- The filing contains an error
Show the answer
Answer: B.
Depreciation can carry cash flow above earnings for years. The question a model must answer is what the business looks like once the assets behind that charge need replacing.In this product, what does a margin of safety measure against?
- The vendor's own estimate of fair value
- A value the investor set: a thesis target price or a saved DCF, and nothing else
- The lowest price of the last twelve months
Show the answer
Answer: B.
Without a value the investor stated, there is nothing to take a margin against, so none is shown.Sources
- SunCoke Energy, Form 10-K, fiscal year ended 31 December 2025, filed 2026-02-20, accession 0001514705-26-000010: operating income, interest expense, depreciation and free cash flow as filed.
- Damodaran, The Dark Side of Valuation: the company types where the standard model breaks, and forecasting a path to a mature margin rather than abandoning the exercise.
- Greenwald and others, Value Investing: From Graham to Buffett and Beyond, 2001: asset value and earnings power value as the anchors that need no growth forecast.
What this leaves out
- The refusal counts describe listings with an indicator row on one date. A refusal is a statement about what could be computed, not about the company.
- No debt line read means unknown rather than debt-free. Several large filers report borrowings this product does not read.
- The replacements named here make their own assumptions. A no-growth value still needs a cost of capital, and an asset floor still needs a haircut you chose.
- Nothing here is advice about any security.