Fundamental Analysis

Intrinsic Valuation — DCF

Put a number on what a business is actually worth. Build a discounted cash flow from scratch — forecast the cash, discount it for time and risk, add a terminal value — on a live model you steer yourself, then compare your value to the price.

0 / 12 done

StartLesson 1 · Intrinsic Value — The Big Idea

What you’ll leave with12 lessons · 12-line playbook

A stock's intrinsic value is the present value of its future cash: forecast the cash, discount it for time and risk, add a terminal value, then buy only below it — with a margin of safety.
Forecast revenue as the top line the model rests on: build it bottom-up (price × volume) or top-down (market × share), fade fast growth toward the economy's rate, and sanity-check every path against the company's history and its industry.
Forecast operating margins forward from the cost mix: fixed costs create operating leverage that expands margins as sales scale, but margins mean-revert too — so haircut peak margins and never extrapolate a record year forever.
Value free cash flow, not earnings: build unlevered FCF forward as NOPAT + D&A − capex − ΔWC and discount it at the WACC — capex-heavy and working-capital-hungry businesses throw off far less cash than their reported profit.
Construct the discount rate: CAPM cost of equity (risk-free + β × equity risk premium), after-tax cost of debt (kd × (1 − tax)), blended by the capital-structure weights = WACC — and a higher-risk business earns a higher WACC and a lower value.
Value everything past the forecast two ways and cross-check: the Gordon perpetuity FCF × (1 + g) ÷ (WACC − g) — with g always below the WACC and near long-run GDP (~2–3%) — and an EV/EBITDA exit multiple on terminal-year EBITDA. It's 60–80% of the DCF, so it's the most sensitive number you'll set.
Assemble the DCF: Σ PV(FCF) + PV(terminal value) = enterprise value; subtract net debt (add it back when it's net cash), trim minorities and add non-operating assets = equity value; divide by diluted shares = intrinsic value per share — and the gap to the price is your margin of safety.
Never trust a single DCF number — it's false precision. Build a 2-variable sensitivity table (colour each value/share cell buy/hold/sell vs price), find which assumption moves value most (usually the WACC), and run bull/base/bear scenarios. Report a range with a most-likely value and demand a margin of safety that holds even in the bear case.
The dividend discount model values equity as the present value of dividends, discounted at the cost of equity: Gordon's V = D₁ ÷ (r − g) for steady payers, two-stage while they're still growing (g always below r). Use it where the dividend is the clearest signal — stable utilities and banks with murky free cash flow — and switch to a DCF for non-payers and high-growth firms.
Flip the DCF: pin value to today's price and solve for the growth, margin, or years of runway it implies — then judge that expectation against the business, not the spreadsheet.
A DCF is only as good as its inputs: keep terminal growth below the WACC and near GDP, don't extrapolate peaks forever, match the cash flow to the rate, count diluted shares, and never reverse-engineer to a target price.
A full intrinsic valuation runs one pipeline end to end: forecast revenue and margins into free cash flow, discount it at the WACC, add a terminal value that's usually most of the number, then bridge enterprise value to equity value to a per-share figure. Set it against the price for your margin of safety — but treat the output as a range, and always ask whether what the price implies is realistic.

Intrinsic Valuation — DCF

All lessons