DCF — Discounted Cash Flow

the app’s core valuation model · Valuation — what a company is actually worth

A DCF answers one question: what is all the cash this business will ever hand its owners worth, in today’s dollars? A dollar you’ll receive in five years is worth less than a dollar today — you could invest today’s dollar in the meantime, and the future is uncertain. So a DCF projects the company’s future cash, “discounts” each future year back to what it’s worth now, and adds it all up. Divide by the share count and you get intrinsic value — what one share is worth if the assumptions hold. Compare that to the market price: higher intrinsic than price = potentially undervalued.

• Free cash flow (the starting point) — the real cash left after a company pays its bills and reinvests; the money genuinely available to owners. The app starts from trailing free cash flow, and refuses to invent a value for cash-burning, pre-profit companies (it shows nothing rather than a guess).
• Growth rate — how fast that cash grows. The app starts from the company’s revenue growth (capped at 30%) and tapers it down to a steady 2.5% a year over five years, because nothing grows fast forever.
• Discount rate (the “r”) — how much to shrink each future dollar. More risk → a higher discount → a lower value today. The app sets this per company from its beta (how volatile the stock is), landing between 8% and 12%.
• Terminal value — the cash beyond year five, estimated with a modest 2.5%-forever growth and then discounted back to today.
• Net debt & share count — subtract what the company owes, divide by shares outstanding → value per share.

A price tag grounded in the business, not the mood of the market. If intrinsic value is $150 and the stock trades at $100, the DCF says you may be paying 100 cents for $1.50 of value — a margin of safety. If intrinsic is $80, the market is already pricing in more growth than the model assumes.

value per share = ( Σ PV(FCFₜ) + PV(terminal) − net debt ) ÷ shares
PV(FCFₜ) = FCFₜ ÷ (1 + r)ᵗ          for each year t = 1…5
terminal  = FCF₅ × (1 + g) ÷ (r − g)     g = 2.5%
r  = clamp( 8% … 12%,  4.3% + β* × 4.7% )
β* = 0.33 + 0.67 × β        (Blume shrink toward the market)

FCFₜ

— the free cash flow projected in year t

r

— the discount rate — how hard future dollars are shrunk (per-company, 8–12%)

g

— the terminal growth rate — the slow, forever growth after year 5 (2.5%)

β (beta)

— how much the stock swings vs the market; feeds the discount rate

PV( )

— “present value” — a future amount pulled back to today’s dollars

Σ

— “sum of” — add the five discounted years together

A DCF is only as good as its assumptions — change the growth or discount rate and the answer moves a lot. That isn’t a flaw, it’s the point: it forces your assumptions into the open where they can be checked. Every Screener card shows the full year-by-year math, and the Sandbox lets you change the inputs yourself and watch the value move.

• The Balance — using a DCF to value a stock ↗