Definition
Discounted Cash Flow (DCF)
DCF is a valuation method that estimates a company's worth by projecting its future cash flows and discounting them back to today's value.
DCF values a business as the present value of all the cash it will generate in future. You forecast free cash flows, apply a discount rate (reflecting risk and the time value of money), and add a terminal value, the sum is the estimated intrinsic value.
DCF is theoretically the soundest valuation approach, but it is highly sensitive to assumptions, small changes in growth or discount rate swing the answer hugely. Use it for stable, predictable businesses, and always cross-check with relative measures like P/E and EV/EBITDA.
Related terms
- Free Cash FlowFree cash flow (FCF) is the cash a company has left after paying operating expenses and capital expenditure, available to reward investors or grow.
- Intrinsic ValueIntrinsic value is the estimated true worth of a business based on its fundamentals and future cash flows, independent of the current market price.
- Margin of SafetyMargin of safety is the practice of buying a stock at a meaningful discount to its estimated intrinsic value to protect against errors and bad luck.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.