Discounted Cash Flow

Discounted cash flow means a valuation method that estimates an investment’s value based on future cash flows adjusted to today’s value. In simple terms, discounted cash flow tries to calculate what future cash is worth right now. Discounted cash flow is important because it focuses on the cash a business may generate over time. Investors use it to estimate intrinsic value and decide whether a stock looks cheap or expensive. For example, an analyst may forecast a company’s future free cash flow and discount it back to the present using a discount rate. Discounted cash flow is not exact. Small changes in assumptions about growth, margins, or discount rates can change the valuation significantly.