DCF (discounted cash flow)
A method that estimates what a company is worth today by projecting the free cash flow it will generate over the coming years and bringing it to present value at a discount rate, usually the WACC.
The underlying idea is that a euro ten years out is worth less than one today, and that a business is worth not what the market says but the cash it has left to generate. The calculation has three pieces: a growth path for the coming years, a discount rate, and a terminal value standing in for everything beyond the projected horizon.
It pays to know where the trap is: in most DCFs, more than half the value comes from the terminal value — that is, from an assumption about a distant future. Moving the discount rate half a point, or perpetual growth by a couple of tenths, shifts the result far more than any tweak to the first three years. A DCF is not a measurement, it's a model of assumptions.
That's why ValuatePad's calculator is interactive and also offers the reverse DCF: instead of asking "what is it worth?", it asks "what growth do you have to believe to justify today's price?". That second question is usually more informative, because the answer doesn't depend on how optimistic you got up feeling.
Where to see it on ValuatePad
Year by year, for every company, in the tab DCF valuation.