What a Business Is Really Worth, Not What the Market Says
A stock trades at $150. The crowd is buzzing, the chart is climbing, and the temptation is to just buy. But a discounted cash flow analysis asks a colder question: what is this business actually worth based on the cash it will generate? Project $5 billion in free cash flow growing 8% a year for a decade, add a terminal value, discount it all back at a 10% rate, divide by the share count, and you might land on an intrinsic value of $118 per share. That $150 price tag is now $32 of pure optimism you would be paying out of your own pocket.
Discounted cash flow is the closest thing investing has to a first-principles valuation. The core idea is that a business is worth the sum of all the cash it will hand owners in the future, adjusted for the fact that a dollar arriving in ten years is worth less than a dollar today. DCF makes that adjustment explicit. It projects free cash flow for several years, estimates a terminal value for everything beyond the forecast window, and discounts every dollar back to present value using a rate that reflects risk and the time value of money.
Free cash flow is the fuel, because it is the cash a business can actually distribute. Unlike accounting earnings, which can be massaged, free cash flow is operating cash minus the capital spending needed to keep the business running. It is what is genuinely available to pay dividends, buy back shares, or reduce debt. A DCF starts by projecting this number forward, usually for five to ten years, based on a defensible growth rate grounded in the company's history and prospects.
Terminal value is where most of the answer hides, and where most errors creep in. Because a business presumably operates long past your forecast window, you estimate a terminal value, often by applying a modest perpetual growth rate, say 2.5%, to the final year's cash flow. In many DCF models, 60% to 75% of the total intrinsic value comes from terminal value. A half-point change in the terminal growth rate or discount rate can swing the valuation by 20% or more, which is why this single assumption deserves the most scrutiny.
This calculator runs the full chain: project free cash flows, compute terminal value, discount everything to today, and divide by shares outstanding to reach a fair value per share. Then it compares that intrinsic value to the market price and shows your margin of safety, the discount you are getting if the price sits below value, or the premium you are paying if it sits above.