Term · Valuation
Discounted Cash Flow (DCF)
In briefA discounted cash flow model derives today's enterprise value from expected future cash flows and a terminal value, discounted at the cost of capital. The result is an assumption-driven model value, not a price observed in the market.
Definition
A DCF valuation determines the present value of a company from expected future cash flows and a terminal value. The figure is a model value, not an observable market price.
How it is calculated
Formula. Enterprise Value = sum FCFF_t / (1 + WACC)^t + Terminal Value / (1 + WACC)^n.
Why it matters for small caps
For small companies, DCF values react especially strongly to a few assumptions about growth, margins, financing, and dilution. The model forces these assumptions to be made transparent.
Common misreadings
- A precise result is often confused with high accuracy. Small changes in WACC, terminal value, or long-term margin can shift the value strongly.
In the process
Frequently asked
What is a DCF valuation?
It estimates the value of a company by discounting future cash flows to the present. The central building blocks are the projected cash flows, the discount rate (WACC), and the terminal value.
What is a DCF used for?
It forces you to disclose assumptions about growth, margins, financing, and dilution and to translate them into a value. Especially for small companies it makes the value drivers visible.
What weakness does the DCF method have?
A result that looks exact easily feigns accuracy. Even small shifts in the discount rate, terminal value, or assumed perpetual margin change the computed value considerably.
Related terms
Sources
Primary
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.