How to Value a Stock — DCF Basics

Discounted cash flow (DCF) is the foundational way to estimate what a business is really worth. The core idea is simple: a company is worth the cash it will generate in the future, converted into today’s money.

The intuition

₹100 next year is worth less than ₹100 today, because money has a time value. DCF estimates a company’s future free cash flows, then "discounts" them back to the present using a rate (often the WACC) that reflects risk and the time value of money. Add them up and you get an estimate of intrinsic value.

The three inputs that drive it

• Future cash flows — how much cash the business will generate (the hardest to forecast).
• Growth rate — how fast those cash flows grow.
• Discount rate — higher for riskier businesses, which lowers the value.

Why it matters even if you never build one

DCF teaches the right mindset: value comes from future cash generation, not from price momentum or stories. Compare your estimate of intrinsic value with the market price and look for a margin of safety — buying well below your estimate to allow for error.

The big caveat

A DCF is only as good as its assumptions — small changes in growth or discount rate swing the answer hugely ("garbage in, garbage out"). Treat it as a reasoning tool and a range, not a precise price. Use it with simpler checks like P/E. Education only, not a recommendation.