Definition
DCF values an asset or business by discounting expected future free cash flows back to present value and adding a terminal value for cash flows beyond the forecast period.
Formula
Enterprise value = PV(forecast FCF) + PV(terminal value)
Example
If you forecast annual free cash flows and discount them back to today, then add a discounted terminal value, the sum is your enterprise value estimate (before converting to equity value).
How to use it
- DCF is highly sensitive to discount rate and terminal assumptions; always run scenarios.
- Use free cash flow (cash) rather than accounting profit where possible.
Common mistakes
- Using terminal growth that is higher than the discount rate (invalid in perpetuity model).
- Treating a single scenario as a precise estimate (false precision).
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "DCF (Discounted Cash Flow)" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Use a calculator that references this term (e.g., DCF Valuation Calculator) to sanity-check assumptions.
- Read the related guide (e.g., DCF valuation: forecast cash flows, discount rate, and terminal value) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- DCF Valuation Calculator: Estimate enterprise value using a simple DCF: forecast cash flows, apply a discount rate (often WACC), and add a terminal value.
- Equity Value Calculator: Convert enterprise value (EV) into equity value using cash, debt, and other adjustments (optionally per share).
- DCF Sensitivity Calculator: Estimate how enterprise value changes with discount rate and terminal growth assumptions (simple 3x3 sensitivity).
Guides
- DCF valuation: forecast cash flows, discount rate, and terminal value: A practical guide to DCF valuation and WACC discount rate choices: how to forecast FCF, choose a discount rate, and avoid terminal value traps.
- Enterprise value vs equity value: how to bridge EV to equity: A practical guide to converting enterprise value (EV) into equity value using net debt and other claims (and avoiding common valuation mix-ups).
- DCF sensitivity: discount rate vs terminal growth (how to read it): A practical guide to DCF sensitivity analysis: why valuations swing, how to pick ranges, and how to avoid terminal value traps.
- Valuation modeling hub: WACC, DCF, multiples, and equity value: A practical hub for valuation modeling: estimate a discount rate (WACC), run a simple DCF with sensitivity analysis, and translate enterprise value to equity value.