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Valuation

Discounted Cash Flow (DCF)

Intrinsic value of an asset as the present value of its future cash flows.

Definition

DCF values a business by projecting future free cash flows and discounting them back to today using a required rate of return (the WACC for an enterprise DCF, or cost of equity for an equity DCF). The output is an intrinsic value independent of current market price. DCF is the gold standard for long-term fundamental valuation, but it is famously sensitive to the discount rate and terminal growth assumption — small changes can flip the verdict.

Formula

Enterprise Value = sum_{t=1..N} ( FCF_t / (1 + WACC)^t ) + Terminal_Value / (1 + WACC)^N

Terminal Value (Gordon growth) = FCF_{N+1} / (WACC - g)

Equity Value = EV - Net Debt
Fair Price   = Equity Value / Shares Outstanding

Worked example

A company generates $500M FCF growing 8% for 5 years, then 2.5% terminally. WACC = 9%. Year-5 FCF ≈ $735M, terminal value = 735 * 1.025 / (0.09 - 0.025) ≈ $11.6B. Discounted: 5-year FCF PV ≈ $2.6B, terminal PV ≈ $7.5B. EV ≈ $10.1B. With $1B net debt and 200M shares, fair price = ($10.1B - $1B) / 200M = $45.50.

How ARIA Analyst uses it

ARIA runs a two-stage DCF in the Valuation Agent on every stock analysis, with WACC pulled from real-time risk-free, equity-risk-premium and beta inputs, and probabilistic terminal growth via Monte Carlo.

Related terms

  • Free Cash Flow (FCF)

    Cash from operations minus capital expenditures — the cash a business actually generates for owners.

  • EV/EBITDA

    Enterprise value divided by EBITDA — a capital-structure-neutral cash earnings multiple.

  • P/E Ratio

    Share price divided by earnings per share — the most popular valuation multiple.

  • Owners' Earnings (Buffett)

    Warren Buffett’s preferred cash-flow measure: net income plus non-cash charges minus maintenance capex.

  • Residual Income Model

    Equity value as book value plus the present value of excess returns over cost of equity.

See Discounted Cash Flow (DCF) in action on any asset

ARIA Analyst computes Discounted Cash Flow (DCF) automatically as part of a hybrid multi-agent investment report — 5 deterministic scoring agents plus AI augmentation (ML ensemble, Bull vs Bear debate, 10 Deep Search agents on Premium). Get yours in seconds.

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