Discounted Cash Flow (DCF) Formula Explanation

The Discounted Cash Flow (DCF) formula is a fundamental valuation method used by investors to estimate the present value of a company based on its expected future earnings. In simple terms, it helps you calculate what future cash flows are worth today by accounting for the time value of money.

PV = ∑ t=1 n EPSt (1+r) t

Explanation of Terms used in Present Value:

  • PV (Present Value): The value today of expected future earnings.
  • EPS (Earnings Per Share): The expected earnings of a company for a given year.
  • r (Discount Rate): The interest rate or required return by investors.
  • t (Time Period): The number of years into the future (0 to 10 years in our calculator).

Using this formula, each year’s expected EPS is discounted back to its present value. By summing up all discounted values for the selected time horizon, you get the intrinsic value of the stock. This makes DCF one of the most widely used methods for stock valuation in fundamental analysis.