This page contains a discounted cash flow calculator to estimate the net present value of an investment. You can vary every aspect of the analysis, including the growth rate, discount rate, type of simulation, and the cycles of DCF to perform.
Discounted Cash Flow Calculator for Investment Valuation
Using the Discounted Cash Flow Calculator
The discounted cash flow stock valuation calculator is relatively straightforward but allows customization with advanced options. By default, it uses Earnings per Share to run valuations; expanding the Advanced Options tab allows you to use Free Cash Flow instead. Enter a trailing 12 month earnings per share (or free cash flow) amount and we apply growth from the first year.
Stock DCF Base Parameters
- Current Stock Price - The most recent trading price for the stock.
- Discount Rate (%) - Return you could earn on another security, sometimes called the 'guaranteed return' (even if not guaranteed!).
- TTM Earnings Per Share ($) - The trailing 12 month, or annual, dollars earned in profit per share of stock. The growth rate is applied in the very first year of simulation.
- Earnings Growth (%) - The annual rate of growth you expect for earnings per share, in the near term.
Advanced Options (Optional)
- TTM Free Cash Flow Per Share ($) - The trailing 12 month, or annual, dollars of free cash flow per share of stock. The growth rate is applied in the very first year of simulation. Optional - used if DCF Type you choose Free Cash Flow.
- Free Cash Flow Growth (%) - The annual rate of growth you expect for free cash flow, in the near term. Optional - used if DCF Type you choose Free Cash Flow.
- Years of Above Growth - The number of years to use near term growth numbers. We conservatively suggest 5 or fewer.
- Perpetual Growth (%) - The perpetual growth in EPS or FCFPS after the near term growth ends. 'Perpetual' Growth is a misnomer, though – we'll only apply the simulation for the number of years you state in 'Years to Simulate'.
- DCF Type - Use either earnings per share or free cash flow per share to value a stock.
- Years to Simulate - The total number of years for the tool to carry out the DCF simulations. All companies (and earnings trends) must end so vary this value based on how conservative you'd like your analysis to be.
Discounted Cash Flow Valuation Output
- Discounted Cash Flow (DCF) / Calculated Fair Value - Estimated fair value per share using the input assumptions.
- Over / Under Value Percentage - Shows the percentage a stock is over or underpriced after computing a valuation.
How to Use a Discounted Cash Flow Analysis
Discounted cash flow analysis is a common technique to determine the contribution to present value of future cash flows. While used often in many aspects of business to set strategy, it's also a useful analysis for evaluating investment choices.
The key to a good analysis - like in most types of analysis (!) - is to pick good projections going forward. While you can often get very good estimates of current conditions, setting the discount rate and earnings growth rate are as much art as science. Those numbers are also quite exploitable; by moving the levers on them you can justify almost any current stock evaluation.
(Make sure you can defend your assumptions.)
Discount rate is the so-called "price in a vacuum", or price you could achieve executing your default investment strategy. If you would fall-back to an index fund, you would enter your expected return on that fund - perhaps 10% annually ignoring the effects of inflation. To set a good number, our S&P 500 Historical Return Calculator might give you some good hints.
Earnings growth is the annual rate at which earnings (or free cash flow) increase. In theory, future earnings belong to the shareholder. In that vein, earnings growth adds to the present valuation as it predicts future earnings. By default, the tool computes 5 years of high-growth earnings before falling back to a lower 'perpetual number' for a total of 'Years to Simulate' cycles. Set your own assumptions by expanding the 'Advanced Options' tab.
DCF: One Aspect of Your Stock Valuation Due Diligence
A discounted cash flow analysis is one of the methods I use when evaluating stocks for my own portfolio. You should always approach your investment decisions holistically - a good DCF reading shouldn't be the only signal that you should own a stock. Many reasons exist that might cause a disconnect - regulatory and legal burdens, bad news, new competition, and a myriad of other reasons might cloud (or pump) a stock's price.
Still, it's good practice to run a DCF analysis on your portfolio (and when looking to add to the portfolio!).
Who knows; maybe some stocks you're evaluating are cheaper than others?
There's only one way to find out - use this tool in good health! Also, try our dividend discount model valuation calculator, or see stock returns in our dividend reinvested stock return calculator.
