DCF
DCF (Discounted Cash Flow) is a financial instrument for determining the fair value of a company.
It is established by assessing future financial flows. In other words, DCF allows you to evaluate in the present the potential income that a business can bring in the future.
So, if an investor has, for example, $1 million, he wants to invest it so that the money does not depreciate due to inflation. Given the amount in just one year, a considerable part of the funds can be lost. Alternatively, they can be put on a deposit, but the rate on such a deposit, as a rule, does not exceed the rate of inflation. In this case, it will be possible to simply save the savings. If you start investing in stock markets or in business, you may be able to increase this amount.
With the help of discounting, you can understand whether the investor will incur losses or, conversely, increase his capital. As a related term in this area, such a concept as the discount rate is used. It represents the percentage of depreciation of savings.
DCF allows you to calculate the value of the company in the future, taking into account not only inflation, but also various other risks. Determining the correct percentage of potential appreciation and depreciation (cash, business, etc.) is one of the most difficult tasks in calculating DCF. Here, even a slight inaccuracy can cause serious distortions in the calculation of the fair value of the company or significant losses.
Despite the fact that the DCF method is based on a fundamental analysis of business performance, it is not a universal tool for assessing the value of a company. This is because the result of discounting is a subjective judgment, for example, about the pace of business development or about changes in the inflation rate. That is why this analysis must be supplemented by others. For example, you can use a comparative analysis of the main market and financial multiples. This will allow you to evaluate the underlying performance of the company's shares in comparison with those of competitors.
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