DCF (Discounted Cash Flow)

What is DCF (Discounted Cash Flow)? — Definition

A Discounted Cash Flow (DCF) analysis is one of the most rigorous methods for valuing a business. The core principle: a dollar received in the future is worth less than a dollar today (because of inflation, opportunity cost, and risk). DCF quantifies this by projecting a company's future free cash flows and then 'discounting' them using a rate (typically WACC) that reflects the riskiness of those cash flows.

The formula: Intrinsic Value = Sum of (FCF in Year N / (1 + WACC)^N) + Terminal Value. The terminal value — what the business is worth after the projection period — often represents 60–80% of total value, making it extremely sensitive to assumptions about long-term growth.

Example

If a company generates $100M in free cash flow, is expected to grow at 8% for 10 years, and your discount rate is 10%, the DCF might yield an intrinsic value of $1.4 billion. If the market cap is $1 billion, the stock may be trading at a 28% discount to fair value.

DCF is the methodological backbone of BMInsider's 100X Insider Reports, where each stock analysis includes projected cash flows and a margin of safety calculation.