What is Discounted Cash Flow?
Discounted Cash Flow analysis estimates what a company is worth today based on how much cash it’s expected to generate in the future. The core idea: a dollar earned next year is worth less than a dollar today, so future cash flows are “discounted” back to present value.
If the DCF value is higher than the current stock price, the stock may be undervalued. If it’s lower, you might be overpaying.
Why it matters for investors
DCF is one of the few valuation methods that tries to calculate an absolute fair value — not a relative comparison to other stocks. Warren Buffett famously uses DCF-style thinking when evaluating investments.
It answers the question every investor should ask: “Based on this company’s expected earnings, what should the stock actually be worth?”
How Stock Analyzer scores it
Stock Analyzer compares the DCF value to the current stock price as a percentage:
| Score | DCF vs. Price | What it means |
|---|---|---|
| A | DCF is 110%+ of price | Stock appears undervalued |
| B | 100% – 110% | Close to fair value |
| C | 95% – 100% | Slightly overvalued |
| D | 85% – 95% | Overvalued |
| E | Below 85% | Significantly overvalued |
What to watch out for
DCF models are only as good as their assumptions. Small changes in growth rate or discount rate can dramatically change the result. Use DCF alongside other metrics — it’s most useful when it agrees with other valuation signals.