A DCF model is a specific type of financial modeling tool used to value a business. DCF stands for Discounted Cash Flow, so a DCF model is simply a forecast of a company’s free cash flow discounted back to today’s value, which is called the Net Present Value (NPV). This DCF model training guide will teach you the basics, step by step.
Even though the concept is simple. There is quite a bit of technical background knowledge for each of the components above. So let’s break each of them down in further detail. The basic building block of a DCF model is the 3 statement financial model, which links the financial statements together. This DCF model training guide will take you through the steps you need to know to build one yourself.
This is a huge topic, and there is an art behind forecasting the performance of a business. In simple terms, the job of a financial analyst is to make the most informed prediction possible. How each of the drivers of a business will impact its results in the future. See our guide to assumptions and forecasting to learn more.
Typically, a forecast for a DCF model will go out for approximately five years. Except for resource or long-life industries such as mining, oil and gas, and infrastructure, where engineering reports can be used. To build a long-term “life of resource” forecast. For an example of this, please see our mining financial modeling course.
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A DCF model estimates a company’s intrinsic value (the value of a company’s ability to generate cash flows) and is often in comparison to the company’s market value.
For example, Apple has a market capitalization of approximately $909 billion. Is that market price justified based on the company’s fundamentals and expected future performance (i.e. its intrinsic value)? That is exactly what a DCF seeks to answer.
In contrast with market-based valuation like a comparable company analysis. The idea behind the DCF model is that the value of a company is not a function of arbitrary supply and demand for that company’s stock. Instead, the value of a company is a function of a company’s ability to generate cash flow in the future for its shareholders.