Online tutorials for calculating DCF (Discounted Cash Flow)?

Question

What is the best online tutorial to learn calculating DCF (Discounted Cash Flow) for a stock?

Answer 1

Here's a link to an online calculator employing the Discounted Cash Flow method: Discounted Cash Flows Calculator. Description:

This calculator finds the fair value of a stock investment the theoretically correct way, as the present value of future earnings. You can find company earnings via the box below. [...]

They also provide a link to the following relevant article: Investment Valuation: A Little Theory. Excerpt:

A company is valuable to stockholders for the same reason that a bond is valuable to bondholders: both are expected to generate cash for years into the future. Company profits are more volatile than bond coupons, but as an investor your task is the same in both cases: make a reasonable prediction about future earnings, and then "discount" them by calculating how much they are worth today. (And then you don't buy unless you can get a purchase price that's less than the sum of these present values, to make sure ownership will be worth the headache.) [...]

Answer 2

Check out Professor Damodaran's website: http://pages.stern.nyu.edu/~adamodar/ . Tons of good stuff there to get you started. If you want more depth, he's written what is widely considered the bible on the subject of valuation: "Investment Valuation".

DCF is very well suited to stock analysis. One doesn't need to know, or forecast the future stock price to use it. In fact, it's the opposite. Business fundamentals are forecasted to estimate the sum total of future cash flows from the company, discounted back to the present. Divide that by shares outstanding, and you have the value of the stock.

The key is to remember that DCF calculations are very sensitive to inputs. Be conservative in your estimates of future revenue growth, earnings margins, and capital investment. I usually develop three forecasts: pessimistic, neutral, optimistic. This delivers a range of value instead of a false-precision single number.

This may seem odd: I find the DCF invaluable, but for the process, not so much the result. The input sensitivity requires careful work, and while a range of value is useful, the real benefit comes from being required to answer the questions to build the forecast. It provides a framework to analyze a business. You're just trying to properly fill in the boxes, estimate the unguessable. To do so, you pore through the financials. Skimming, reading with a purpose. In the end you come away with a fairly deep understanding of the business, how they make money, why they'll continue to make money, etc.

Answer 3

what do you mean exactly? Do you have a future target price and projected future dividend payments and you want the present value (time discounted price) of those?

Edit:

The DCF formula is difficult to use for stocks because the future price is unknown. It is more applicable to fixed-income instruments like coupon bonds. You could use it but you need to predict / speculate a future price for the stock.

You are better off using the standard stock analysis stuff: Learn Stock Basics - How To Read A Stock Table/Quote

The P/E ratio and the Dividend yield are the two most important. The good P/E ratio for a mature company would be around 20. For smaller and growing companies, a higher P/E ratio is acceptable. The dividend yield is important because it tells you how much your shares grow even if the stock price stays unchanged for the year.

HTH

Answer 4

If you want to obtain DCF valuation for multiple companies without manually inputing data into Excel and building models manually, you can check out ValueInvesting.io. Here is the example of Google

Answer 5

I don't want to be rude but if you know Mohnish Pabrai. One of his 10 commandments is that you don't need a DCF to know that a stock is undervalued. If you cannot calculate immediately by comparing a stock to his peers when looking at P/S, PE, PEG or cash, etc, or doing 4th class math, it may not be worth the investment because the market may be pretty efficient on that particular stock. Because you want at least a 2-bagger. Otherwise, it is hard to beat the index. And as a professional, you don't want to diversify too much.
In 2022 actually, the best stock market return was in Turkey because all foreign investors just got scared of the high inflation rate "produced" by Mr. Erdogan and basically fled Turkey. You know what, Mohnish invested in Turkey. Particularly in those businesses where revenues are in € and costs are in Lira. Know where to fish is also fairly important.

The problem with DCF valuation is an accounting problem. Cash flow from operations is the net cash from selling to customers and of course adds to value, but the FCF calculation then subtracts cash investment. This is odd because investments are made to add value, not reduce it (the notorious corporate jet aside). Firms consume cash to generate value (that’s fundamental!). Firms reduce FCF when they increase investments (reducing value in the DCF calculation) and increase FCF when they reduce investments (increasing DCF value). Using FCF in valuation is not only odd, it’s perverse. As firms increase FCF by liquidating investment, FCF is more a liquidation concept than a measure of added value from increasing investments. In short, FCF is not good accounting for value, if you evaluate Amazon, Walmart or Tencent.

As Charlie Munger once said: If you only use 1 mental model (DCF) when investing, you'll become a person with a hammer, thinking everything is a nail.