Learning about the DCF Model

A discounted cash flow (DCF) model answers one simple question: what is a company's future cash worth in today's dollars? If that future cash, discounted back to the present, is worth more than the current stock price, the stock may be undervalued — and vice versa. This page introduces the model at a high level; no finance background needed.

The big idea in 30 seconds

A business is worth the cash it will generate over its lifetime. But a dollar received ten years from now is worth less than a dollar today, because today's dollar can be invested and grown meanwhile. A DCF projects the cash flows year by year, shrinks each future dollar by a discount rate to reflect time and risk, and adds them up. That total — divided by shares outstanding — is the model's fair value per share.

The three inputs every DCF needs

1. Cash flows — usually free cash flow (operating cash flow minus capital expenditures), the money a business actually produces after maintaining itself. Our models read this from a decade of SEC filings, not estimates.

2. A growth assumption — how fast that cash will grow during the projection window before fading toward a low perpetual rate. Growth is where most of a DCF's uncertainty lives: small changes swing the answer a lot.

3. A discount rate — typically the weighted average cost of capital (WACC, roughly 8–12% for most public companies), encoding the time value of money plus risk. Higher risk means a higher discount rate and a lower present value.

How to read the result

Compare the model's fair value per share to the market price. Above the price suggests undervaluation; below suggests overvaluation. Sensible investors demand a margin of safety — only acting when the gap is big enough to absorb everything the model could get wrong, since a DCF organizes your beliefs but can't predict fraud, regulation, or disruption.

Go deeper

Ready for the full walkthrough — projecting growth, discounting, terminal value, and the pitfalls (including why bank DCFs deserve skepticism)? Read How a DCF Valuation Actually Works. Or skip the theory and see live fair values computed from real 10-K data on our stock screener.