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StockCram is not a broker-dealer, investment adviser, or financial institution. All content is for educational and informational purposes only and should not be construed as personalized investment advice. Consult a qualified financial professional before making investment decisions. Past performance does not guarantee future results.Simple Definition
A valuation method that estimates what a company is worth based on its expected future cash flows, adjusted for the time value of money.
Why It Matters
DCF is the gold standard of fundamental valuation. It answers: "What's this company really worth?" by projecting future cash flows and discounting them back to today's dollars. Warren Buffett calls it the only sensible approach to valuation. If the DCF value is higher than the stock price, the stock may be undervalued.
Key Points
- Core formula: Sum of (Future Cash Flow ÷ (1 + Discount Rate)^Year) for each projected year
- The discount rate reflects risk — higher risk businesses need higher expected returns
- DCF is highly sensitive to assumptions — small changes in growth rates dramatically change the result
Related Terms
Common Questions
A valuation method that estimates what a company is worth based on its expected future cash flows, adjusted for the time value of money. DCF is the gold standard of fundamental valuation. It answers: "What's this company really worth?" by projecting future cash flows and discounting them back to today's dollars.
DCF is the gold standard of fundamental valuation. It answers: "What's this company really worth?" by projecting future cash flows and discounting them back to today's dollars. Warren Buffett calls it the only sensible approach to valuation. If the DCF value is higher than the stock price, the stock may be undervalued.
Core formula: Sum of (Future Cash Flow ÷ (1 + Discount Rate)^Year) for each projected year
The discount rate reflects risk — higher risk businesses need higher expected returns
DCF is highly sensitive to assumptions — small changes in growth rates dramatically change the result