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About Discounted Cash Flow

The purpose of the Discounted Cash Flow (DCF) method is to find the sum of the future cash flow of the business and discount it back to a present value. I use the F Wall Street method of valuing a business along with some tweaks here and there to suit my tastes.

The advantage of this method is that it requires the investor to think about the stock as a business and analyse its cash flow rather than earnings. The first and foremost reason a business exists is to make money where money = cash, not earnings. Since cash is what a business needs in order to maintain and grow its operations, it’s only right to consider the possibility of its future cash growth rather than earnings growth.

The disadvantage is that a DCF is not suitable for start ups, growth companies or capital intensive companies where the cash flow cannot be accurately determined. The error of prediction and assumptions must also be dealt with in the DCF, which we cover with margin of safety.

I’ll go through the many assumptions to consider with a DCF. (If you are considering using the spreadsheets found on this site, please don’t just follow it blindly.)