Discounted Cash Flow valuation estimate
⚠️ Simplified model for education - not investment advice
⚠️ Important: This is a SIMPLIFIED DCF model for educational purposes. Professional DCF analysis includes detailed financial modeling, scenario analysis, and multiple assumptions. This calculator demonstrates basic concepts only.
Discounted Cash Flow (DCF) values a company based on its projected future cash flows, discounted back to present value.
Basic Concept:
DCF is considered more comprehensive than P/E ratios, but requires many assumptions that significantly impact the result.
What it is: The actual cash a company generates after paying all expenses and investing in equipment/facilities.
Why it matters: This is real money the company could pay to shareholders or reinvest. Unlike "earnings," it can't be manipulated with accounting tricks.
Where to find it: Cash Flow Statement → "Operating Cash Flow" minus "Capital Expenditures"
Example: If a company generates $1.2B in operating cash and spends $200M on new equipment, FCF = $1B
What it is: How fast you expect the company's cash flow to grow each year for the next 5 years.
Why it matters: A company growing at 20% is worth much more than one growing at 5%. This is your biggest assumption.
Typical ranges: High-growth tech: 15-25% | Established companies: 5-10% | Mature/slow: 0-5%
Example: If FCF is $1B and growth is 10%, next year's FCF will be $1.1B, then $1.21B, etc.
What it is: The growth rate you expect FOREVER after year 5. Yes, forever.
Why it matters: No company can grow fast forever. Eventually they mature and grow with the economy.
Typical range: 2-3% (roughly GDP growth). Never use more than 5% - that's unrealistic.
Example: If you use 3%, you're saying "after 5 years, this company will grow 3% per year forever"
What it is: The return you require to invest in this company. Higher risk = higher rate.
Why it matters: $100 today is worth more than $100 in 5 years. This rate converts future cash to today's value.
Typical ranges: Safe companies: 8-10% | Average risk: 10-12% | High risk/startups: 15%+
Think of it as: "I need at least 10% annual return to invest in this stock instead of an index fund"
What it is: Total number of shares that exist. Simple.
Why it matters: We divide the total company value by this to get value per share.
Where to find it: Any financial website, usually shown as "Shares Outstanding" in millions
Example: If company is worth $10B and has 100M shares, each share is worth $100
⚠️ WARNING: DCF is highly sensitive to assumptions. Small changes in growth rate or discount rate can dramatically change the valuation. This simplified model omits many important factors.
Garbage in, garbage out: Results are only as good as your assumptions about future growth.
Highly sensitive: 1% change in discount rate can change valuation by 20%+.
Doesn't work for unprofitable companies: Negative cash flows make DCF unreliable.
Ignores market sentiment: Stocks can trade above/below DCF value for years.
This model is simplified: Professional DCF includes debt, cash, working capital changes, detailed WACC calculation, and scenario analysis.
Professional approach: Analysts build detailed financial models with multiple scenarios (bull/base/bear case), sensitivity analysis, and combine DCF with other valuation methods. For educational purposes only.
Scenario: Growing tech company with $1B current FCF, trading at $150/share.
This suggests the stock may be undervalued. However, if growth rate is only 8% instead of 10%, fair value drops to $145 (overvalued). This demonstrates DCF's sensitivity to assumptions.
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