How the DCF calculator works
A discounted cash flow (DCF) values a company as the sum of the cash it will generate, each amount brought back to today’s money. This calculator values the whole firm from its free cash flow, then subtracts net debt to reach the value of the shares.
Free cash flow in year t = revenue in year t × free cash flow marginPresent value = free cash flow ÷ (1 + discount rate)^tTerminal value = last free cash flow × (1 + terminal growth) ÷ (discount rate − terminal growth)Enterprise value = sum of present values + terminal value ÷ (1 + discount rate)^NValue per share = (enterprise value − net debt) ÷ sharesWith the starting values (a fictitious company with revenue of 1,000, growing 8% a year at a 15% free cash flow margin, discounted at 9%), the value comes to about 26.9 per share. About three quarters of it comes from the terminal value — which is typical, and is the main reason to look at the sensitivity table.
Choosing your assumptions
- Growth: start from the last few years and from analysts’ forecasts, then ask how long that pace can last. Few large companies sustain more than 10–15% a year for long.
- Free cash flow margin: use an average over several years rather than one good year; check it against the company’s operating margin.
- Discount rate: the return investors require, usually the weighted average cost of capital (WACC). A common estimate for the cost of equity is the risk-free rate plus beta × an equity risk premium of about 5%.
- Terminal growth: it applies forever, so it should not exceed long-run nominal growth of the economy. 2–3% is the usual range.
- Net debt and shares: take them from the latest balance sheet, and use diluted shares.
Reading the result
A DCF gives a range, not a target. Change the discount rate by one point and the value per share often moves by 15–25%; the sensitivity table shows by how much for your inputs. If most of the value comes from the terminal value, the result depends above all on what happens after the forecast — the part nobody can see.
Comparing the value with the price tells you what your assumptions imply, not what the market will do. To work the other way round — from the price to the growth it implies — use the reverse DCF calculator.
Limits
- The output is only as good as the inputs: small changes to growth, margin or the discount rate change the answer a lot.
- Banks and insurers are valued differently: their debt is part of the business.
- Companies with negative free cash flow need explicit year-by-year forecasts, not a constant margin.
- Cyclical companies should be valued on mid-cycle margins, not peak or trough.
For a fuller explanation, see the DCF explained.
The same engine as InvestIQ
The discounting in this calculator is the same code as the valuation module of InvestIQ’s Stock Analysis. There, the inputs come from consensus revenue forecasts and the company’s accounts, the discount rate from a CAPM estimate shown in full, and the result is completed by scenarios, a reverse DCF and a sensitivity grid. How the rest of the engine works is in the methodology.