Discounted Cash Flow

Explanation

DCF is considered the most theoretically rigorous valuation method because it values an asset based on the actual cash it will generate. The process: (1) project free cash flows for 5-10 years, (2) estimate a terminal value for all cash flows beyond the projection period, (3) discount all cash flows to present value using WACC, (4) sum to get enterprise value. The challenge is sensitivity to assumptions — small changes in growth rate or discount rate can dramatically alter the result, leading to the saying 'garbage in, garbage out.'

Formula

How Stoquity Uses This

Stoquity incorporates discounted cash flow analysis across its portfolio management platform, providing real-time monitoring and AI-powered insights for every portfolio.