What is the DCF Valuation?

Discounted Cash Flow (DCF) valuation is a method used to estimate the “present value” (PV) of a company’s future cash flows. The method assumes that a company’s value depends on the cash it can generate in the future. Mathematically, the present value of cash flows can be calculated as follows:

• Present Value =Future Cash Flow(1 + Disclunt Rate)n

As per general market understanding, the DCF process involves the following steps:

1. Estimate future free cash flows.

1. Select an appropriate discount rate.
2. Calculate the present value of those cash flows.
3. Estimate the terminal value.
4. Add the present values to arrive at the estimated enterprise value.
5. Adjust for debt and cash to estimate equity value.

Note: The DCF valuation of stocks is sensitive to assumptions about revenue growth, profit margins, cash flows, and discount rates. Therefore, the result is only an estimate rather than a guaranteed value.

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