Discounted Cash Flow (DCF)

Strip it to what is actually true. A company is worth the cash it will hand you over its life, and cash later is worth less than cash now. Put those two truths together and the value of any business is just its future cash, each year pulled back to what it is worth today. That is the whole idea a discounted cash flow (DCF) makes concrete.

So a DCF values a company by answering one question: what is all the cash this business will generate in the future worth to you today?

The mechanics have three moves:

1. Forecast the cash flows. Project the free cash flow the company will produce over an explicit period, usually five to ten years.
2. Discount them to today. Money next year is worth less than money now, so each future year is divided by a discount rate (often the WACC) that reflects risk and the time value of money.
3. Add a terminal value. Beyond the forecast period, estimate the value of all cash flows into perpetuity and discount that back too.

Sum the discounted cash flows and the discounted terminal value, and you have the company's estimated intrinsic value.

That is the definition. What makes a DCF you can actually defend is a separate, harder question, and that is what the Rich-Data DCF section is about.