DCF Valuation — A Step-by-Step Guide

Every intrinsic value estimate ultimately rests on one question: what cash flows will this business generate over its life, and what are those future cash flows worth today? The Discounted Cash Flow model is the formal answer — and the most rigorous tool a value investor can master.

Why This Matters

DCF valuation is simultaneously the most theoretically correct method of valuing a business and the most dangerous when applied carelessly. A 1% change in the long-term growth assumption can shift the output by 30–40%. This is not a reason to avoid DCF — it is a reason to use it correctly: as a range-builder with explicit assumptions, not as a calculator that produces a precise "answer." Buffett has said he does DCF in his head. What he means is that for businesses with predictable cash flows, the arithmetic is straightforward. The difficulty is always in the inputs — forecasting free cash flow and choosing a discount rate that reflects genuine risk, not false precision.