What Is Discounted Cash Flow?

Discounted cash flow (DCF) analysis is a core valuation method in finance. It projects a company’s future free cash flows and then discounts those flows back to the present using a rate that reflects the investment’s risk. Summing those present values yields an estimate of what the company is worth today. Dividing by the number of shares outstanding gives a per-share intrinsic value that investors can compare with the market price.

Free Cash Flow and Growth

Free cash flow represents the cash a company can generate after accounting for operating expenses and capital expenditures. Many analysts start with the most recent year’s figure and apply an expected annual growth rate. Growth often slows over time as a business matures, so this calculator uses a simple constant rate for the projection years. You can adjust the rate higher or lower depending on how optimistic you are about future prospects.

Discount Rate

The discount rate reflects the required return to invest in the company. It accounts for the time value of money and the risk that projected cash flows may not materialize. The Weighted Average Cost of Capital (WACC) is often used for this purpose, combining the cost of equity and debt financing. Mathematically, each projected cash flow $F_t$ is divided by $(1+r{}^t)$ where $r$ is the discount rate and $t$ the year.

Terminal Value

After the explicit forecast period, analysts assume cash flows grow at a steady “terminal” rate forever. The terminal value formula resembles the present value of a perpetuity: $\frac{F_{\mathrm{n+1}}}{r}$, where $g$ is the terminal growth rate and $F_{\mathrm{n+1}}$ is the first cash flow after the projection period. This value is also discounted back to the present.

Using the Calculator

Provide the current free cash flow in millions, an expected annual growth rate, your chosen discount rate, a long-term terminal growth rate, the number of years to project, and the number of shares outstanding. Optionally include the current market price to compute upside relative to the intrinsic value estimate. After clicking Calculate, the script produces the intrinsic value per share and a table of yearly cash flows so you can see how each contributes to the final valuation.

Margin of Safety

Value investors often require a buffer between estimated intrinsic value and the market price. If the intrinsic value is $30 and the stock trades at $20, the margin of safety is 33%, calculated as $\frac{\text{Value - Price}}{\text{Price}}$. A large margin of safety helps protect against forecasting errors or unforeseen events. The calculator reports the percentage difference so you can gauge whether the gap meets your personal threshold.

Sensitivity Analysis

Because small tweaks to growth and discount assumptions can dramatically change the result, analysts often run multiple scenarios. You might evaluate optimistic, base, and pessimistic cases by adjusting the growth rate and discount rate in turn. Plotting these outcomes illustrates how fragile or robust your valuation is. While this simple tool performs a single calculation, you can rerun it quickly with alternative inputs to build your own sensitivity table.

Comparables and Sanity Checks

DCF is only one lens. Comparing the implied valuation to market multiples such as price-to-earnings or enterprise value to EBITDA can provide a reality check. If your DCF value is far above peers with similar metrics, revisit your assumptions. Likewise, consider the company’s capital structure—heavy debt loads may require adjusting the discount rate upward.

Limitations

DCF results depend heavily on the assumptions you enter. Small changes in growth or discount rate can swing the valuation dramatically. The model assumes a constant growth rate and stable competitive environment, whereas real companies face cycles, disruptive technologies, and shifting consumer preferences. Taxes, working-capital needs, and capital expenditures may also vary from year to year. Nonetheless, DCF provides a structured framework for thinking about how future cash generation translates into today’s value when used alongside qualitative research.

Conclusion

By projecting cash flows and discounting them appropriately, investors can gauge whether a stock appears undervalued or overvalued relative to its current market price. Use this tool to explore scenarios, compare with other valuation methods, and develop a disciplined margin-of-safety approach. Real-world investing still demands continuous monitoring of fundamentals and markets.