DCF
Discounted cash flow
Valuing a business as the sum of all the cash it will ever produce, in today's money.
A DCF forecasts free cash flow for five or ten years, discounts each year back to the present, then adds a terminal value to represent everything afterwards.
Typically 60 to 80% of the answer sits in that terminal value: the part you have just admitted you cannot forecast. This is not a reason to dismiss the DCF, but it is a reason to distrust anyone who quotes its output to two decimal places.
The most valuable way to use one is backwards: ask what growth rate today's price already implies, and then decide whether you believe it.
The order matters more than the maths
Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.
It forces you to state your assumptions explicitly, which is the only way to find out they are wrong.
Treating the output as a prediction rather than as an argument.
Related terms
See DCF on a real company
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