The Discounted Cash Flow Method

Investors should consider using the Discounted Cash Flow (DCF) method to estimate the absolute value of a company

Morningstar.co.uk Editors 20 February, 2013 | 2:30PM

This article is part of Morningstar.co.uk's Equity Investing Week.

Financial ratios and multiples provide a quick and easy way for investors to determine the general value of a stock compared to other investments in the market. But how do we go about estimating the absolute value of any company? That's when discounted cash flow (DCF) can come in handy.

Valuation methods based on discounted cash flow models determine stock prices in a different and more robust way. DCF models estimate what the entire company is worth. Comparing this estimate, or "intrinsic value," with the stock's current market price allows for much more of an apples-to-apples comparison. For example, if you estimate a stock is worth £20 based on a DCF model, and it is currently trading at £10, you know it's undervalued.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Coca-Cola Co53.49 USD-2.62
eBay Inc34.64 USD-1.14

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Morningstar.co.uk Editors  analyse and report on shares, funds, market developments and good investing practice for individual investors and their advisers in the UK.

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