<#-- Rebranding: Header Logo--> <#-- Rebranding: Footer Logo-->
  1. DCF Analysis: The Forecast Period & Forecasting Revenue Growth
  2. DCF Analysis: Forecasting Free Cash Flows
  3. DCF Analysis: Calculating the Discount Rate
  4. DCF Analysis: Coming Up with a Fair Value
  5. DCF Analysis: Pros & Cons of DCF
  6. DCF Analysis: Conclusion

DCF analysis is widely used by investment bankers and other finance professionals. Even though determining a company’s DCF is a fairly lengthy and involved process, some retail investors like to perform their own calculations rather than rely on the word of analysts. Whether you calculate DCF on your own or take the word of analysts, it’s important to consider the method’s strengths and weaknesses.

Pros

  • DCF offers the closest estimate of a stock’s intrinsic value. It’s considered the most sound valuation method if the analyst is confident in his or her assumptions.
  • Unlike other valuation methods, DCF relies on free cash flows, considered to be a reliable measure that eliminates subjective accounting policies.
  • DCF isn’t significantly influenced by short-term market conditions or non-economic factors.
  • DCF is particularly useful when there’s a high degree of confidence regarding future cash flows.

Cons

  • DCF valuation is very sensitive to the assumptions/forecasts made by the analyst. Even small adjustments can cause DCF valuation to vary widely – which means the fair value may not be accurate.
  • DCF tends to be more time-intensive compared with other valuation techniques.
  • DCF involves forecasting future performance, which can be very difficult, especially if the company isn’t operating with 100% transparency.
  • DCF valuation is a moving target: If any company expectations change, the fair value will change accordingly.

DCF Analysis: Conclusion
Related Articles
  1. Investing

    DCF Valuation: The Stock Market Sanity Check

    Calculate whether the market is paying too much for a particular stock.
  2. Personal Finance

    Discounted cash flows or comparables: Which to use

    DCF and comparables models are widely used in equity valuation, and here we'll explain the pros and cons of each method.
  3. Investing

    Discounted Cash Flow (DCF)

    Discover how investors can use this valuation method to determine the intrinsic value of a stock.
  4. Investing

    Fundamental Investment Metrics For Buying Stocks And Bonds

    Don't let the name fool you. Even a "fundamental" investor has to pay attention to certain metrics.
  5. Investing

    Using DCF In Biotech Valuation

    Valuing firms in this sector can seem like a black art, but there is a systematic way to pin a price on potential.
  6. Personal Finance

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  7. Investing

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
Trading Center