TreasureXDCF Valuation Explained: How to Calculate a Stock's Intrinsic Value
A plain-English guide to discounted cash flow (DCF) valuation — what it is, the formula, its assumptions, and its biggest limitations.
What is a DCF valuation?
A discounted cash flow (DCF) valuation estimates what a company is actually worth today, based on the cash it's expected to generate in the future — not on what the stock market currently happens to be paying for it.
The core idea: a dollar you receive today is worth more than a dollar you receive in ten years, because today's dollar can be invested and grow. A DCF projects a company's future free cash flows, then "discounts" each year's cash flow back to a present-day value using a discount rate. Add all those present values together (plus a terminal value for cash flows beyond the projection period) and you get the company's intrinsic value.
The formula, in words
Intrinsic Value = Sum of (Future Free Cash Flow ÷ (1 + discount rate)^year) for each projected year, plus a Terminal Value discounted back the same way.
The discount rate is usually the company's WACC (Weighted Average Cost of Capital) — roughly, the blended return investors require for the risk of holding that stock. Riskier, more unpredictable businesses get a higher discount rate, which lowers their intrinsic value for the same cash flows.
Why the assumptions matter more than the math
The arithmetic behind a DCF is simple algebra — a spreadsheet can do it instantly. The hard part, and the part that actually determines the answer, is the assumptions: how fast will revenue grow for the next 5-10 years? What operating margin will the business settle into? How risky is this specific company relative to the market?
Change the growth assumption from 10% to 15% and a DCF's output can swing by 30-50%. This is why two analysts using the same DCF framework on the same company can land on wildly different fair values — they disagree on the inputs, not the formula.
What a DCF can't tell you
A DCF is a framework for thinking rigorously about value, not a crystal ball. It can't predict a surprise product failure, a regulatory change, or a recession. Garbage assumptions in, garbage valuation out.
The more useful way to use a DCF: run it under a Bear, Base, and Bull growth scenario, and see how wide that range is. A tight range across scenarios suggests a well-understood business; a huge range is itself information — it tells you the stock's fair value is highly sensitive to things nobody can predict with confidence.
Try it yourself
TreasureX's free DCF wizard walks through this exact process — enter a ticker, adjust revenue growth / margin / risk with sliders instead of spreadsheet formulas, and get a Bull/Base/Bear fair value range with a plain-English verdict on whether the current price looks cheap or expensive relative to your assumptions.
Educational content only — not investment advice. Do your own research.