Methodology
What is a DCF, and why we use it
A discounted cash flow values a company by the cash it can generate — not by sentiment or a multiple. Here's the idea in plain language.
The core idea
A business is worth the cash it will hand to its owners over its lifetime. A discounted cash flow (DCF) makes that literal: project the free cash flow a company will generate, then translate those future dollars into what they are worth today.
That's the whole premise. Everything else — growth rates, margins, discount rates — is just the machinery for estimating those two things well.
Why 'discounted'?
A dollar next year is worth less than a dollar today, for two reasons: you could invest today's dollar and earn a return, and next year's dollar is uncertain — it might not arrive. The discount rate converts future cash back to present value, and it rises with risk. Riskier, less predictable cash flows are discounted harder.
The two hard parts
A DCF is only as good as its inputs, and two inputs do most of the work:
- The cash flows — how fast revenue grows, what margin it earns, how much must be reinvested. These are judgment calls about the future.
- The discount rate — how risky those cash flows are, expressed as the return investors require to hold the stock.
Why a range beats a single number
Because the inputs are judgments, a single 'the value is $27.10' hides how sensitive that figure is to its assumptions. StockValuer researches three coherent scenarios — bear, base, and bull — so you can see the range and decide where within it you sit.
What a DCF is good and bad at
A DCF forces you to be explicit about what a company must achieve to justify its price — that clarity is its real value. It is weakest where cash flows are hardest to forecast: pre-profit companies, sharp cyclical swings, or businesses in rapid structural change. Treat the output as a disciplined estimate to interrogate, not a verdict.