A valuation method that estimates intrinsic value by projecting future cash flows and discounting them to present value at an appropriate rate.
Deeper Explanation
A DCF says: if this business generates X in cash every year for the next 10 years, growing at Y%, what is that stream of cash worth today given a required return of Z%? The discount rate reflects the opportunity cost of capital — typically 8-12% for most equity investors. DCF's greatest virtue is forcing explicit assumptions about growth, margins, and risk. Its greatest weakness is sensitivity: small changes in terminal growth or discount rate produce large changes in value. Buffett uses DCF conceptually but prefers simple earnings-multiple checks as a reality test. "All investing is putting out cash now to get more cash later — a DCF is just that thought made explicit."
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