Project free cash flow
Forecast revenue, margins, capex, and working capital for the next five to ten years. The explicit forecast period. Granular for years one through three, more thematic beyond.
Definition
What is DCF valuation?
A DCF valuation projects future free cash flows, discounts them at the cost of capital, and sums the result to estimate intrinsic value. It is the canonical method for valuing any income-producing asset. The output is only as reliable as the assumptions about growth, margins, and the discount rate.
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Short answer
Aswath Damodaran calls DCF the only first-principles way to value a business. Every other multiple (P/E, EV/EBITDA, P/B) is a shortcut that bundles assumptions about growth, risk, and reinvestment. DCF forces those assumptions out into the open where they can be challenged.
The DCF in three steps
Compute terminal value
Capture the value of cash flows beyond the explicit period. Most commonly a Gordon-growth perpetuity at a sustainable long-run rate. Terminal value usually drives most of the answer.
Discount and sum
Translate every future cash flow to present value at the weighted average cost of capital. Add them together and subtract net debt. Result: equity intrinsic value.
A worked example
A mid-cap consumer brand produces 1 billion dollars in free cash flow, expected to grow 5 percent per year for ten years and then 3 percent forever. With a 9 percent discount rate, the explicit-period present value is roughly 8.5 billion dollars and the terminal value another 12 billion in present-value terms. Total enterprise value is about 20.5 billion. Subtract 2 billion of net debt and equity intrinsic value lands near 18.5 billion dollars.
invest-like surfaces DCF reasoning inside every fair-value verdict; see /methodology/.
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Related
- Buffett-Fit methodology - DCF feeds the Buffett-Fit valuation pillar; this is how owner-earnings cash flows roll up into a fit grade.
- Seven-framework methodology hub - how DCF intrinsic-value bands plug into the valuation pillar across all seven framework rubrics.
See DCF reasoning on a real verdict
Every fair-value verdict on invest-like reports DCF intrinsic-value range with assumptions stated openly.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.