Discounted cash flow
The idea
A company is worth the cash it will produce for its owners, adjusted for the fact that cash arriving in ten years is worth less than cash arriving today. A discounted cash flow model makes that literal: forecast the free cash flow for some years ahead, divide each year by a discount rate compounded over the distance, and add the results together.
The appeal is that it reasons from the business rather than from what other people are currently paying. The difficulty is that it needs you to predict the future, and it will produce a confident-looking number whatever you predict.
Most of the answer is the part you can least justify
You cannot forecast forever, so a DCF forecasts explicitly for five or ten years and then adds a terminal value standing in for everything after that. In a typical model the terminal value is somewhere between half and three quarters of the total.
That is worth sitting with. The bulk of the valuation comes from the years you did not model, derived from an assumed growth rate continuing indefinitely - and that rate cannot exceed the long-run growth of the economy without implying the company eventually becomes the economy.
The discount rate does most of the remaining work
The discount rate is the return you require for taking the risk. It compounds, so a small change to it moves the answer sharply: shifting from 9% to 10% can cut a valuation by a fifth or more, with nothing about the forecast having changed.
This is why two careful analysts can build the same model on the same company and land thousands of dollars apart, and why a DCF output should be read as one point in a range rather than a target price.
Using it honestly
The productive way to use a DCF is backwards. Rather than asking what the model says a company is worth, put the current price in and solve for what the market must be assuming about growth and margins. That converts an unfalsifiable forecast into a question you can actually judge: is that assumption plausible?
The calculator on each company page starts from the reported cash flow history rather than a blank sheet, so you can see which assumptions you are changing and by how much. Treat the output as a sensitivity exercise, not a price target.
