DCF Calculator: Estimate a Stock's Intrinsic Value
A discounted cash flow model answers one question: what are the cash flows this business will produce worth to me today? It sounds complicated, but the core idea fits in a single calculator.
This free DCF calculator values a stock per share using two growth stages and a terminal value. It then applies the Gingernomics 25% margin of safety to give you a buy-below price.
How to Use the DCF Calculator
You need six inputs. Change any of them and the results update instantly.
Free cash flow per share. Use the last full year, or a five-year average for cyclical businesses. Subtract stock-based compensation if it is material.
Growth, years 1 to 5. Your estimate of annual FCF growth over the next five years.
Growth, years 6 to 10. Usually lower than the first stage, as growth fades.
Discount rate. The annual return you require. Many investors use 8–10% for stable large companies and higher for riskier ones.
Terminal growth. The growth rate after year 10, forever. Keep it at or below long-run economic growth, around 2–3%.
Current share price. Used to compare price with value.
New to the method? Read what is discounted cash flow first, then come back.
What the Results Mean
Intrinsic value is the sum of ten years of discounted cash flows plus the discounted terminal value, all per share.
Buy below (25% MOS) is intrinsic value multiplied by 0.75. Criterion 5 of the Five Criteria asks for a price at least 25% below a conservative value estimate.
Price vs value shows how far the current price sits above or below your estimate. A negative number means the stock trades below value.
The table underneath shows each year's cash flow and its present value. The line to watch is the terminal value share. If it is above about 70% of the total, most of your answer depends on the distant future, and small changes in assumptions will swing the result.
The Formula
For each year, the calculator grows the cash flow and discounts it back to today.
Step | Calculation |
Cash flow in year t | Previous year's FCF × (1 + growth rate) |
Present value in year t | FCF in year t ÷ (1 + discount rate)^t |
Terminal value | Year 10 FCF × (1 + terminal growth) ÷ (discount rate − terminal growth) |
Intrinsic value | Sum of 10 present values + discounted terminal value |
This is the same logic John Burr Williams set out in The Theory of Investment Value in 1938, and that Warren Buffett has described in his shareholder letters as the way to value any business.
How to Stay Conservative
A DCF is only as reliable as its inputs. Three habits keep it honest.
Run three cases. A base case, a pessimistic case and an optimistic case. If the stock only looks cheap in the optimistic case, it is not cheap.
Anchor growth to history. If FCF grew 6% a year for a decade, assuming 15% needs a specific reason. Check how to read a cash flow statement to find the real history.
Let quality set the discount rate. A business that passes Criteria 1 to 4 deserves a lower rate than one with debt and no moat. Do not use a low rate to justify a price.
Having worked in investor relations, I have seen how sensitive analyst price targets are to one or two assumptions. The margin of safety exists because your estimate will be wrong. The only question is by how much. Our guide to the margin of safety goes deeper.
Frequently Asked Questions
What discount rate should I use? Use the return you need to make owning the stock worthwhile, usually 8–10% for stable companies. Keep it constant across stocks so you compare like with like.
Why use free cash flow instead of earnings? Earnings include non-cash items and ignore capital spending. Free cash flow is the cash an owner could actually take out. See what is free cash flow.
Can I use this for a company with negative free cash flow? Not meaningfully. A DCF works best for established businesses with positive, reasonably predictable cash flow.
Why does a small change in terminal growth move the value so much? Because the terminal value captures every year after year 10. When the discount rate and terminal growth are close together, the result becomes very large.
Your Next Step
Score the rest of the business with the Five Criteria scorecard.
Cross-check your answer with the FCF yield calculator.
Learn the wider toolkit in what is stock valuation.
About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.
The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
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