Investing term
What is DCF (discounted cash flow)?
Estimate intrinsic value by adding up the present value of every future cash flow the business produces.
A DCF (discounted cash flow) values a business by estimating every future cash flow it will produce and discounting each back to today's dollars — because money received later is worth less than money now. Sum those present values, and you get an estimate of what the whole business is worth today.
It's the most rigorous valuation method in theory, because it ties value directly to the cash a business actually generates rather than to a market multiple. But its output is only as good as its inputs: a DCF depends on forecasts of future cash flows and a chosen discount rate, and small changes in those assumptions swing the answer enormously. That sensitivity is why experienced investors treat a DCF as a disciplined way to think about value and test assumptions, not as a precise oracle that spits out the 'right' price.
A DCF estimates every future cash flow and discounts each to a smaller value today, summing them to an intrinsic value. Rigorous in theory, but its output is only as good as its assumptions.
For example
You forecast a company's cash flows for ten years, discount each back to today at 9%, add them up, and arrive at an intrinsic value of about $60 a share.
Learn it by doing
That's DCF (discounted cash flow) in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 15, Valuation for Investors).
Try the free lesson →Why it matters to you
A DCF matters because it forces you to make your assumptions about growth, profitability, and risk explicit, and to value a business on the cash it can generate rather than on sentiment. Even when the precise number is unreliable, the exercise disciplines your thinking and reveals what has to be true to justify a price. Its danger is false precision — a DCF can be tuned to produce almost any answer, so its value lies in the reasoning, not the decimal point.
⚠ Trusting the false precision of the output
A DCF produces a specific number, but that number rests on forecasts and a discount rate that small changes swing wildly. It's easy to reverse-engineer a DCF to justify a price you already like. Treating the output as precise truth, rather than as a range shaped by explicit assumptions, is how DCFs mislead. Focus on the assumptions and their sensitivity, not the exact figure.