Valuation metric

DCF (Discounted Cash Flow)

Discounted Cash Flow (DCF) estimates a company's intrinsic value by projecting its future cash flows and converting them to today's value using a discount rate. The idea: a business is worth the cash it will generate over time, adjusted for the fact that money in the future is worth less than money today.

Formula

DCF = Σ (Future Cash Flowₜ / (1 + r)ᵗ) + Terminal Value

How to interpret it

If the DCF value is higher than the current market price, the stock may be undervalued; if lower, it may be overvalued. The discount rate (often the weighted average cost of capital, WACC) reflects risk — higher risk means a higher rate and a lower present value.

Example

Simplified: if a company is expected to generate $100 next year and you use a 10% discount rate, that cash is worth $100 / 1.10 ≈ $90.9 today. A full DCF sums many such discounted years plus a terminal value for everything beyond the forecast.

Common uses

Estimate a stock's intrinsic value from its projected future cash flows.
Stress-test how sensitive a valuation is by varying the growth and discount-rate assumptions.
Compare the DCF value with the market price to judge over- or undervaluation.
Anchor a long-term investment thesis in cash generation rather than short-term sentiment.

Limitations

DCF is highly sensitive to its assumptions — growth rate, discount rate and terminal value.
Small changes produce very different results, which is why it's sometimes called "garbage in, garbage out." It's a framework for thinking about value, not a precise oracle, and works best with stable, predictable businesses.

In Fin Screener

Fin Screener runs a DCF valuation for each stock using growth, discount-rate and terminal assumptions, and blends it with other methods to produce an average fair value and margin of safety.

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