Module II· Football Field & SensitivitiesIntermediate
Question
What is a tornado diagram, and when do you use it?
Answer
Tornado diagram
visualizes valuation sensitivity to several variables, ordered from high to low. Each variable appears as a horizontal bar — its length is proportional to the change in EV for a ±X% change in the variable.
Deep diveShow more details
Example — variable weight in a DCF valuation
| Variable | Input range | EV impact | Bar size |
|---|---|---|---|
| Margins | ±5% | ±10% | large (top) |
| WACC | ±50 bps | ±7% | medium |
| g | ±0.5% | ±4% | small |
| Tax rate | ±2% | ±2% | very small |
Visually this produces the "tornado shape" with the largest bars at the top.
Application
Identifies the critical assumptions for DD focus or negotiation strategy.
Pitch tip
The tornado slide is a strong pitch tool — it quickly shows senior MDs what drives valuation risk.