How to read a DCF Model

Introduction: Why DCF Matters

• A Discounted Cash Flow (DCF) model tells us what a stock is actually worth—not just what the market says.

• Think of it like this: If you could own a business forever, how much would you pay today for all of its future profits? That’s what DCF helps you figure out.

Step 1: Understanding the Key Inputs

• Revenue Growth Rate – How fast will the company grow?

• Free Cash Flow (FCF) Margin – How much cash does it actually generate?

• Discount Rate (WACC) – What’s the risk-adjusted cost of capital?

• Terminal Value – What’s the company worth after the forecast period?

Step 2: Breaking Down the DCF Calculation

Step 3: What This Tells You

• If Intrinsic Value > Market Price → The stock is undervalued (potential buy).

• If Intrinsic Value < Market Price → The stock is overvalued (potential short).

• But remember, a DCF model is only as good as the assumptions you put in.