DCF (Discounted Cash Flow)
A method that estimates a "theoretical fair value" by converting future earnings into present value and summing them.
In plain terms
$1,000 today and $1,000 ten years from now are worth different amounts. Future money has to be discounted (because of the opportunity and risk of waiting).
DCF estimates the earnings a company will make each year, discounts them more the further out they are, converts them to today's value, and adds them all up. That sum is "the company's theoretical value."
What it tells you
It is a framework for gauging whether the current price is cheap or expensive relative to the company's future value.
Where PER and PBR are "relative value compared with others," DCF is closer to an "absolute value" that starts from the company's own cash-generating power.
Formula
Sum of (each future year's earnings ÷ (1 + discount rate)^year) (the further in the future, the more it is discounted to present value)
What high or low means
If the estimated DCF value is higher than the current price, it is theoretically undervalued; if lower, overvalued.
But it is only an estimate based on assumptions, so treat it as one reference framework, not a correct answer.
DCF is extremely sensitive to assumptions. Changing the future growth rate or discount rate even slightly shifts the result a lot — hence the saying "garbage in, garbage out."
So rather than a tool for finding one correct answer, it is better used to test "what assumptions would justify today's price" by trying several scenarios.
It is especially hard to apply to loss-making companies or ones with uncertain futures.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see DCF and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.