Discounted Cash Flow (DCF) Model
Overview
The DCF model estimates a company's intrinsic value by projecting future free cash flows and discounting them to present value — it is the gold standard of fundamental valuation used by professional analysts worldwide. Building a reliable DCF requires careful assumptions about growth rates, discount rates, and terminal value, but when done correctly it provides the most rigorous basis for stock buy and sell decisions. This technique sits at the heart of value investing and pairs naturally with fundamental analysis when compared to technical analysis. Use our financial calculators to run sensitivity tables and stress-test your DCF assumptions across bull, base, and bear scenarios.
Key Takeaways
- Intrinsic Value = Sum of projected FCFs discounted to present value + terminal value.
- The discount rate is typically the Weighted Average Cost of Capital (WACC).
- Terminal value often accounts for 60-80% of total DCF value — the growth rate assumption is critical.
- DCF is highly sensitive to discount rate and growth assumptions — always run sensitivity analysis.
Practical Tips
- Build a base case, bull case, and bear case with different growth and discount rate assumptions.
- Use a terminal growth rate of 2-3% (roughly nominal GDP growth) — never higher.
- Sanity-check the DCF output against market price and multiples-based valuations.
More Valuation Metrics Guides
Price-to-Book (P/B) Ratio
The P/B ratio compares a stock's market value to its book value (net assets), providing a floor valuation that is especially useful for banks, insurance companies, and asset-heavy industries. <a href="/strategies/fundamental-analysis/value-investing">Value investors</a> have long used P/B to identify <a href="/market/stocks">stocks</a> trading below the liquidation value of their assets. This guide explains when a low P/B signals genuine undervaluation versus deteriorating asset quality, and how to adjust book value for intangibles and goodwill. Filter for low P/B opportunities using our <a href="/tools/screener">stock screener</a> and pair the results with profitability metrics for a complete picture.
EV/EBITDA — Enterprise Value Multiple
EV/EBITDA is a capital-structure-neutral valuation metric favoured by professional analysts and private equity firms for comparing companies regardless of their debt levels. Unlike the P/E ratio, EV/EBITDA accounts for debt and cash positions, making it ideal for evaluating <a href="/market/stocks">stocks</a> in capital-intensive industries or during M&A analysis. This guide covers when to use EV/EBITDA, its advantages over P/E, and common pitfalls that can mislead investors — an essential part of <a href="/strategies/fundamental-analysis/earnings-valuation-analysis">earnings valuation analysis</a>. Screen for attractive EV/EBITDA multiples with our <a href="/tools/screener">stock screener</a> and compare candidates against <a href="/market/indices">index</a> benchmarks.
Price-to-Earnings (P/E) Ratio
The P/E ratio is the most widely used <a href="/market/stocks">stock</a> valuation metric, comparing a company's share price to its earnings per share in a single intuitive number. It appears everywhere from financial news to our <a href="/tools/screener">stock screener</a>, making it essential knowledge for every investor. Learn to use trailing P/E, forward P/E, and the PEG ratio to determine whether a stock is cheap relative to its growth — a core technique in <a href="/strategies/fundamental-analysis/earnings-valuation-analysis">earnings valuation analysis</a>. Check our <a href="/glossary">glossary</a> for quick definitions of EPS, PEG, and other metrics referenced in this guide.