Discounted Cash Flow method (DCF)
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5 ماه پیش
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What is discounted cash flow,
What is discounted cash flow, and how to get started on building a DCF model. A big part of what the discounted cash flow method is all about, is right there in the name: it involves estimating future cash flows, and discounting or translating them to today’s equivalent. A lot of people use the DCF method in order to decide whether to buy, sell or hold a share of a publicly listed company. Your first steps into using discounted cash flow can be fairly easy!
⏱️TIMESTAMPS⏱️
00:00 What is discounted cash flow
00:31 Present value
01:21 Definition of discounted cash flow
01:54 DCF method limitations
02:46 DCF modeling options
04:51 Discount rate in DCF model
07:20 Free Cash Flow in DCF analysis
09:02 Number of forecasting periods in DCF
09:26 Simplest DCF possible
10:23 Enterprise value and equity value
11:31 DCF with current year free cash flow
13:20 Present value of a growing perpetuity
14:07 Draft DCF outcome comparison
15:22 Building a DCF model in Excel
17:11 Analyzing revenue data
19:59 Analyzing margin data
21:06 Analyzing operating expenses
23:18 Analyzing Operating Income
23:41 Analyzing Other Income
24:12 Analyzing interest expense
24:52 Effective tax rate
25:41 Analyzing Net Income
25:59 Non-cash adjustments
28:51 Analyzing CapEx
29:54 Reconciling free cash flow
30:09 Forecasting in the DCF model
30:54 Forecasting revenue and gross margin
32:37 Forecasting operating expenses
34:03 Forecasting Operating Income to Net Income
35:53 Forecasting Cash From Operating Activities (CFOA)
38:39 CFOA growth vs revenue growth
39:16 Forecasting CapEx spending
39:38 Free Cash Flow estimate
40:09 Applying WACC in the DCF model
42:20 Terminal Value in the DCF model
43:46 Enterprise Value in the DCF model
45:05 DCF outcome summary
46:06 Reviewing share price dynamics
47:23 Confirmation bias
47:48 Summary of practical DCF tips
If you understand the concept of present value, then it will be easy to understand discounted cash flow.
My definition of the DCF method: an attempt to estimate the value of a share today, based on projections of how much cash the company could generate in the future. You can also perform a discounted cash flow analysis on the level of the company itself, or on the level of a single investment.
In discounted cash flow modeling, you have some important choices to make: you can keep it very simple, or make it very complex. Let’s do both in this video, in a discounted cash flow #valuation case study of Verizon telecom. Come look over my shoulder as I go through various methods and calculations, and interpret the numbers.
The nice thing about keeping your #DCF modeling simple is that you don’t need a “deep” knowledge of the company, its financial statements, or finance and accounting terminology. The big risk is obviously that you might underestimate the company’s complexity and dynamics. Most people go in the direction of complexity, which might look and feel more impressive, but is dangerous if you lack “clear thinking” skills and are unable to see the big picture. If you have hundreds of line items in your discounted cash flow model, do you really understand which of those are the high impact ones? It’s easy to get lost in spreadsheet complexity, with numbers not tying out or formulas incomplete. Only go complex when you’re able to handle it!
There are basically three elements that you need to make a choice on: discount rate, number of line items in your model, and the number of forecasting periods. Each of these has a simple version, and a complex version, and options in between.
In the second half of the video, we build a DCF model in Excel! Choose a level of complexity that is manageable for you to build a discounted cash flow model.
So where do you even start, when you want to build a DCF model in Excel? First step is to load, analyze and understand historical data. This can help you understand the drivers of the business, trends, and expected ranges for certain parameters. Probably the most useful part of building a discounted cash flow model is getting a deeper understanding of the company. Once that first step is done, you next review and incorporate the company’s guidance, forecast each line item in a solid and prudent way, and “zoom out” to make sense of the Big Picture.
Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!
Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through @thefinancestoryteller
⏱️TIMESTAMPS⏱️
00:00 What is discounted cash flow
00:31 Present value
01:21 Definition of discounted cash flow
01:54 DCF method limitations
02:46 DCF modeling options
04:51 Discount rate in DCF model
07:20 Free Cash Flow in DCF analysis
09:02 Number of forecasting periods in DCF
09:26 Simplest DCF possible
10:23 Enterprise value and equity value
11:31 DCF with current year free cash flow
13:20 Present value of a growing perpetuity
14:07 Draft DCF outcome comparison
15:22 Building a DCF model in Excel
17:11 Analyzing revenue data
19:59 Analyzing margin data
21:06 Analyzing operating expenses
23:18 Analyzing Operating Income
23:41 Analyzing Other Income
24:12 Analyzing interest expense
24:52 Effective tax rate
25:41 Analyzing Net Income
25:59 Non-cash adjustments
28:51 Analyzing CapEx
29:54 Reconciling free cash flow
30:09 Forecasting in the DCF model
30:54 Forecasting revenue and gross margin
32:37 Forecasting operating expenses
34:03 Forecasting Operating Income to Net Income
35:53 Forecasting Cash From Operating Activities (CFOA)
38:39 CFOA growth vs revenue growth
39:16 Forecasting CapEx spending
39:38 Free Cash Flow estimate
40:09 Applying WACC in the DCF model
42:20 Terminal Value in the DCF model
43:46 Enterprise Value in the DCF model
45:05 DCF outcome summary
46:06 Reviewing share price dynamics
47:23 Confirmation bias
47:48 Summary of practical DCF tips
If you understand the concept of present value, then it will be easy to understand discounted cash flow.
My definition of the DCF method: an attempt to estimate the value of a share today, based on projections of how much cash the company could generate in the future. You can also perform a discounted cash flow analysis on the level of the company itself, or on the level of a single investment.
In discounted cash flow modeling, you have some important choices to make: you can keep it very simple, or make it very complex. Let’s do both in this video, in a discounted cash flow #valuation case study of Verizon telecom. Come look over my shoulder as I go through various methods and calculations, and interpret the numbers.
The nice thing about keeping your #DCF modeling simple is that you don’t need a “deep” knowledge of the company, its financial statements, or finance and accounting terminology. The big risk is obviously that you might underestimate the company’s complexity and dynamics. Most people go in the direction of complexity, which might look and feel more impressive, but is dangerous if you lack “clear thinking” skills and are unable to see the big picture. If you have hundreds of line items in your discounted cash flow model, do you really understand which of those are the high impact ones? It’s easy to get lost in spreadsheet complexity, with numbers not tying out or formulas incomplete. Only go complex when you’re able to handle it!
There are basically three elements that you need to make a choice on: discount rate, number of line items in your model, and the number of forecasting periods. Each of these has a simple version, and a complex version, and options in between.
In the second half of the video, we build a DCF model in Excel! Choose a level of complexity that is manageable for you to build a discounted cash flow model.
So where do you even start, when you want to build a DCF model in Excel? First step is to load, analyze and understand historical data. This can help you understand the drivers of the business, trends, and expected ranges for certain parameters. Probably the most useful part of building a discounted cash flow model is getting a deeper understanding of the company. Once that first step is done, you next review and incorporate the company’s guidance, forecast each line item in a solid and prudent way, and “zoom out” to make sense of the Big Picture.
Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!
Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through @thefinancestoryteller
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