DCF Calculator

How a DCF turns cash flow into a share price

A discounted cash flow model values a business as the cash it will produce for its owners, converted into today's money. There are four steps. Project free cash flow for each of the next ten years. Discount each year back to the present at a rate that reflects the risk of owning the business. Estimate a terminal value for everything after year ten and discount that too. Then adjust for the balance sheet and divide by the share count.

The result is an intrinsic value per share: what the business is worth on your assumptions, regardless of what the market is paying today. Comparing it with the price gives the margin of safety, the room for your assumptions to be wrong before the investment loses money.

Use free cash flow, which is operating cash flow minus capital expenditure. It is the cash left after the business has paid to keep itself running and growing, so it is the cash that could reach shareholders.

Where the value actually comes from

On the default inputs, $1 billion of free cash flow growing 10% a year for five years and 6% for the next five, discounted at 9%, the ten projected years are worth $9,956 million today. The terminal value adds $14,356 million, so 59% of the enterprise value comes from years the model does not project at all.

That is normal, and it is the most important thing to understand about any DCF. Subtract $2 billion of net debt and the equity is worth $22,312 million, or $44.62 per share across 500 million shares.

How much the discount rate moves the answer

The discount rate is the return you require for the risk of owning the business. Many investors use 8% to 10% for an established company and more for a small or volatile one. Small changes have large effects: on the same cash flows, one point either side of 9% moves the value by 16% to 21%.

How much the terminal growth rate moves it

Terminal growth is the rate the business grows forever after year ten. It should sit at or below long-run economic growth, which is why 2% to 3% is the usual range. No company outgrows the economy forever, and a terminal rate close to the discount rate produces a value that is mostly arithmetic.

When a DCF is the wrong tool

A DCF needs positive, reasonably predictable free cash flow. It does not suit banks and insurers, whose cash flows are mixed up with their customers' money, and it says little about a company that currently burns cash, because the whole value then rests on the terminal year.

For a company you already follow, the DCF page for each stock on Intrinsiqq runs the same kind of two-stage model on the company's reported figures, with every assumption shown.

Common questions

What is a DCF calculator?

A tool that estimates a company's intrinsic value from its future free cash flows. It projects the cash, discounts it to today's money at a required return, adds a terminal value for the years after the projection, and divides the result by the number of shares.

What discount rate should I use?

The return you require for the risk. For large, stable companies many investors use 8% to 9%; for smaller or more cyclical businesses 10% to 12% is common. If you are unsure, run the model at two rates a couple of points apart and treat the range as the answer.

What terminal growth rate is reasonable?

Usually 2% to 3%, roughly the long-run growth of the economy. Anything above 4% assumes the company outgrows the economy forever, and the value it produces should be treated with suspicion.

Why is most of the value in the terminal value?

Because a healthy business keeps producing cash long after year ten, and all of those years are summarised in one number. On the default inputs the terminal value is 59% of the total. Shares above 75% mean the answer depends almost entirely on the terminal assumptions.

What is margin of safety?

The gap between the intrinsic value and the price, as a share of the value. A $44.62 value against a $40 price is a 10% margin of safety. Many value investors look for 25% to 30%, because the estimate itself can easily be that far out.

Is a DCF the same as an intrinsic value calculator?

Intrinsic value is the answer; a DCF is the most common method for reaching it. Other methods exist, such as earnings-based formulas or asset values, but for an operating business with steady cash flow a DCF is the standard.

What should I enter for net cash?

Cash and short-term investments minus total debt, in millions. If the company owes more than it holds, the figure is negative, and it reduces the equity value.