How to value a company using discounted cash flow (DCF) - MoneyWeek Investment Tutorials

Every investor should have a basic grasp of the discounted cash flow (DCF) technique. Here, Tim Bennett introduces the concept, and explains how it can be applied to valuing a company.

[@Villagejonesy]

I think this man is a great teacher. He explains everything in very clear language, and avoids obscurantism, yet without slowing the moving train down so much that it's at a crawl. He does well at presenting all the principles clearly, when it is easy to make someone's head swim, especially when a bit of maths are introduced. Good work!

[@janefromcanada6943]

In all my years of accounting I have never heard it explained better. You made it so easy to understand. You are an excellent teacher. Thank you for posting

[@salgsalgglas]

Thankyou Tim. Your voice modulation is perfect for the listener to grasp the concepts you explain.

[@pakasunijo9370]

It has been mention several time in the video, "it's basic" of course other assumptions and calculation are not mention.This guys proves that any "complicated topic" should be explainable to a kid!!!! wonderful job Tom

[@seelondon100]

The explanation makes the concepts are pretty easy to understand. Very helpful.

[@timmypompom4810]

Thanks for the detailed explanation. You're the first person on youtube that I've seen so far that goes into detail to give people a better understanding of the formula instead of just showing us how to plug in the numbers.

[@dekass7965]

I always come back to this video.. It's been over 2 years now.. The best dcf explanation!

[@awdswds1988]

This guy is freaking amazing. Superb explanation!!!

[@davidtorres3333]

Can you do a real-life example with a publicly traded company?

[@Thrillseeker8922]

I could listen to this guy talk about bricks and mortar all day long. The way he talks and explains things is so entrancing.

[@PrasenjitSarkarSingapore]

Have watched a few of your videos and found, in each one of them (including this one), a very lucid explanation which even a layman can understand. Thank you!

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[@jahmiahguillory8711]

Great intro video. Just finished my MBA and needed a quick refresher as I evaluate a business

[@willi9723]

Thank you Tim. I'll apreciate if you could continue with these valuation models. You're a really nice teacher.

[@MoneyWeekVideos]

Yep - the result of applying DCF is to generate a net present value. Tim.

[@bharatmittal9937]

Appreciate. Very nicely presented. Easy for students to comprehend. I am also a faculty and a professional in India dealing with Business Valuation and Corporate restructuring. Enjoyed the presentation style and the Content too. Keep it up. All the best.

[@johnbandah2639]

let me cry first for failing my last exam 😭😭😭 finally I understand these the DCF. thanks for the great video

[@rezakhoyi9438]

Fantastic teaching method employed by this brilliant teacher-Bravo

[@caeila808]

i despaired of ever understanding DCF analysis but this gave me a toehold!

[@adamfearon672]

Great video. Thank you. (Finance major that was taught DCF in college, but never actually learned it. Until now)

[@Samil360]

Adam Fearon haha same here!

[@darkdefender6384]

Adam Fearon I hear ya man. I was a business major and I wish profs explained things so straight forward. I guess if they did “too many” people would actually learn and graduate from college LOL!

[@shrutipun3851]

Are

[@shrutipun3851]

Adam Fearon was my

[@roynotintown]

Your lectures have played a predominant role in clearing my professional exam. it has enhanced my understanding about the subject :) thanks a lot:)

[@D4rkenedskies]

Why didn't I see you a year ago!? I failed that class, elective in my last year... Now working in m&a, I finally found you and understand... Thanks you, I'm just feeling stupid how I didn't understand it and failed the test...

[@mikenorman5172]

This is brilliant Tim and a good video to watch. I really want to start something new like investing in the market. For starters I have no idea

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[@discountingrate1869]

Discounting Rate . com

[@popkahchin]

read books like fundmental analysis for dummies or intelligent investor or security analysis. These books will be enough for you

[@davidstevens3934]

Such a pleasant surprise to get a trustworthy British accent on a financial explanation video 😂

[@TheHumanSpirit]

Excellent presentation. *Thank you.* Your presentation skills (e.g., cadence, calm, clarity, knowledge, ability to simplify, ability to foresee questions) = 💯 across the board. *Subscribing*

[@BladeBoques]

This was really helpful! I've studied this awhile and this is the first time is really made sense. Is there a part 2 that you made somewhere along the line? Hope there was demand for it, I'd like to learn more from you on the topic of DCF.

[@nathaliehumstur7009]

THANKS YOU SO MUCH! THIS HELPED ME A LOT! ❤️❤️❤️ IM A FIRST YEAR FINANCE STUDENT WISH ME LUCK!!!

[@lunamorris2091]

Thank you a lot for this video. This is very interesting and informative. Keep posting like those amazing videos, this is awesome.

[@ranilium]

Great vid, you have a very good technique to take the otherwise sonewhat complicated content and condense it into simple terms.. I got alot out of it . Thanks mate

[@tschmiedeke9291]

Nice work Tim - would be very helpful if you could take the three valuation techniques you covered and apply them to "real-world" examples. Most of us are interested in the stock market, so how can we better use these techniques to perform valuations on the companies we are looking to invest in vs. an outright purchase? Again, really appreciate your teaching style. Thank you!

[@Fernandolunatoro1]

Todd, It has very little to do with it. Just look at today's PEs. Before you go at it Fundamentally, I suggest you learn a good technical analyses. Price action is king.

[@Villagejonesy]

Todd, I think that is a good idea as well.

[@imlkr_]

It's been 7 years... How you doing mate?

[@lalthlamuangidarlong-if2nb]

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[@cuihe6992]

Great videos! I was scratching head revising for corporate finance exam and still couldnt get my head around the evaluation approach. You are a star!

[@slavachicago99]

Interest rate of 10% sounds so extreme in 2020

[@kingofheartsxyz]

this video is for high school kids .. a lot of the video i watched they are scared to discuss how to arrive at the discount rate and what to do if a company has a negative EBTA

[@mehmetsahinozalumni5620]

%10 sounds so low when you live in Turkey

[@antonioromero878]

@@mehmetsahinozalumni5620 spot on!

[@celmasantos831]

@@kingofheartsxyz ,n

[@vj5vt]

Well nasdaq went up approx 40% in 2020 and s&p 500 about 16%.

[@joshuamanampiu6489]

Thanks for this simplification of the DCF Model. Yes there is demand for more.

[@fatemeazizi1863]

I would like to introduce you to the free online business valuation software of Ratiba . I hope it is useful for your business. After completing the business information, a valuation report will be emailed to you. Online valuation tools in this software are : 1. DCF Method : retiba.com/online-valuation/discounted-cash-flows/ 2. Risk Factors Summation : retiba.com/online-valuation/risk-factors-summation/ 3. Multiples Method : retiba.com/online-valuation/multiples-method/ 4. Score Cards Method : retiba.com/online-valuation/score-cards-method/

[@connorchristopher4917]

These videos are more helpful than my corporate finance lectures at uni

[@emmanuelowolabi12]

You're a great teacher. Enjoyed this lecture! 👍

[@darylallen2485]

I find your videos reek of competence sir. Well done.

[@michaelmidzio1472]

To me this is just an introduction video on DCF mechanics, which does a good job. Discount rate (e.g. 10%) will be different per each company and will change over time. The riskier the company the higher the discount rate. And yes, DCF is built upon PV calculation. If you understand PV formula you will also understand DCF.

[@narijodeco6869]

Sir, you are such a good teacher. Thanks!

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[@williammazzacca8136]

Great videos. The explanation of DCF was the best I’ve seen including the way I learned it in college. Did you or will you do a video on CAPM? Thanks for the education. It’s very helpful.

[@evanwilliamson3602]

This dude's voice is so calm, I'm going to put his videos on to get to sleep haha.

[@dereka8041]

Finance 101. Finished my M.B.A., back in 2012. We studied several business case studies, from the Harvard Business School. Maybe considering inflation would have helped too. Inflation runs around 1.8 percent.

[@morfsevals4106]

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[@maxmudbekmurodov6938]

the best explanation i saw) thanks from Uzbekistan

[@tanveerabbas3271]

this is a very good video to clear concepts. thk you

[@debashishbramha]

Just Brilliant. Thanks from India.

[@ely2732]

Great video! I would like a more collocates video. And you could go over CAPM model as well within the more complicated DCF valuing of a company.

[@robnugent916]

great tutorial...wish I had this back in grad school

[@malgray7396]

I find Tim an excellent Tutor .love him and his white board.usually go back over it a couple times to totally get it.

[@alireza2295]

Terminal value and the impact of interest rate well explianed. Thank you!

[@gourmayo]

Very well done video. Clear and concise - great teacher

[@HeldEd]

This was such a great explanation, great video!

[@amitd1572]

Brilliant Video to educate the masses. Appreciate.

[@oakinvestment5371]

I now know as much about how to value a company using DCF as I knew 10min 49sec ago..

[@PapaPev]

Please could you do a weighted average cost of capital video? Specifically with a touch on finding component costs... Would make a good answer for the "how do you get the 10%" question.

[@Omahaneb6]

Best dcf teaching

[@yusifsadik6935]

Awesome video. Wish this guy had more.

[@sameester]

Thanks, would love to watch a follow up!

[@jenifferhall6868]

Marvelous video...Tim. Im looking forward to see the more details part of DCF.

[@Theodore_e]

Thank you for this helpful video! Can someone please explain how to get your growth rate to then get your terminal value.

[@kamrana2805]

Tim I was wondering, whats your opinion on pennystocks? Are pennystocks even taken seriously in the financial industry? If so, then can you give us some "insider secrets" to pennystocks; maybe do a video on it, or if you've already done the video then maybe you can direct me to it. Thanks. PS love your videos. Keep up the good work.

[@042justin]

Is there a video expanding upon this concept? Also, is the NPV in a DCF analysis like saying that instead of the company being worth 500 million, its actually worth 378 million? Moreover, are the cash values for every year Free Cash Flows??

[@marshallhosel1247]

Thank you, was useful refresher and info.

[@millan112]

The DCF will help you calculate the market value of company assets. Goodwill is an asset so there is that connection.

[@zikapavlovic8729]

Well explained! Thank you Tim!

[@iliyaremizov3679]

Can you do a more thorough video about the DCF valuation method? getting into the how you determine the terminal value, the interest rate / WACC. thanks !

[@lxnny2357]

What is the interest rate you're referring to? And why is it relevant here? Is it related to corporate bonds? I get that it's related to the risk, but how do you pick that number?

[@ITSophy]

Helped more than my text book, great tutorial, actually understand now!

[@ab5526]

Which calculation for the value of intrinsic value is most accurate: 1) DCF(earnings based), 2) DCF (FCF based), 3) projected FCF. Thank you.

[@Sam-zx4rp]

Do em all and take the mean value 🤔🤔

[@realdeal3262]

Great lesson Tim bravo

[@mildundklar]

Excellent! You've helped me already with this superficial overview! Greetings from Germany!

[@gmo709]

For the cash flows in the more advanced sessions, I assume you will use future FCF and remove Capex portion. I think.Buffet used owner's earnings FCF, but that calc gives me a headache. So you want to set that discount rate to what you want to beat what you can get in a safer investment. Then when you find the particular stock and the intrinsic value, you want a big margin of safety! That is putting the intrinsic value against the market value. That % shld be bigger for small fish (50%) and around 25% for Industry leaders. Basically, you want to purchase at a deep discount...just like everything else you buy...but you want quality. Takes work bc many stocks will be priced at or near intrinsic value. When priced way over, time to wake up and come alive. It is quite exciting to find an edge. But first, I must study more. Best to really learn all.you can up front prior to action. It is a shame I didnt study this yrs ago, but that is ok. It is the process and journey that is satifying. The better returns is icing on the cake.

[@varunhegde7828]

That was very clear and but what if the cashflows still occurs after 5years untill infinity but we have only 5 years cashflows and the cash flow contines 100million there after ?

[@ValerieAbena]

Thank you so much! After some time stressing I finally find a video that explains it in a way I can understand 🤗

[@luisborges2048]

This is a greatly explained video.

[@aridiconsiglio]

great video but where should i get the interest rate from ?

[@justinrrizzo]

Just so I understand correctly, this valuation would no be entirely precise, since you would be actually be earning 10% on the 1st years earnings for 4 years, and 10% on the 2nd years earnings for 3 years, etc. Is that correct? (actually, wouldn't that calculation be the Internal Rate of Return?)

[@maliquepapailler]

Great introductory for me, into learning about DCF. Thanks!

[@mozpassion8996]

Hi Tim, how do we get in to decision if we could buy or not this company? and if is yes, for how much?

[@mullerstephan]

since interest rates are negative now is the money actually getting more worth in the future?

[@DewTime]

I immediately noticed that 90m at a rate of 10% does not add up to the original 100m. Should have rounded the 90.9 to 91. Anyway good video!

[@shalvsakhare2978]

Thank you for the great lesson! Keep it up.

[@ramenisgood4u]

Thanks for another great video ! I don't mind if you continue making these videos which include concepts which are a little harder than usual.

[@Commando303X]

Something that's always thrown a wrench into my thinking on this matter (i.e., of discounting), is, $100 million today will have more buying-power than $100 million in five years' time; ergo, the former amount is "worth more."

[@whatwelearned]

Well you just have to consider that inflation exists and then it's true 99& of the time

[@Commando303X]

​@@whatwelearned, inflation has nothing to do with net-present-value or discounted-cash-flow models in finance -- even Tim Bennett, for a moment (2:52), misspeaks on this point in this video.

[@MrsGG-id1os]

@@Commando303XI know what you mean “compounding” and “delayed gratification” is the key here. But also not going into the nitty gritty details because like Warren Buffett said “the secret to life is weak competition” and believe me, I am not trying to have more competition

[@hoochone3225]

Is the "CF" used in the above example derived from figures reflecting in the CF Statement or is "CF" actually Nett Profit, still to be posted to the Capital Acc.

[@imicca]

love the British English! Always feels like the accent that any good teacher should use haha

[@kenwallin1133]

You have established that this company (assume on-going operations) will generate 500 m pounds, then you discount, which is good so far. Now if I am going to consider buying this company ... what will be the NPV after I pull out the amount I pay for the company?

[@sathyajithmenon1384]

Fantastic explanation

[@mkahraman82]

Nice video. How can we find company CF for next 5 years ?

[@dereka8041]

In my opinion, the most difficult part of valuing anything is determining a proper "r" value. To me, that's the most difficult part.

[@antonioromero878]

Well standard is 6%

[@Javssoccer]

1:50 start

[@valueink]

Could you elaborate on what do we do with that number ($378 mil). How do I figure out if a company is undervalued or overvalued?

[@snptrader2]

I learned this in college many years ago, but it was never called discounted cash flow. When he said "Net Present Value", then the lights went on. Funny how something several decades ago that was learned is recalled by just calling it what was learned decades ago.

[@tannertucker22]

An enterprise is assumed to operate in perpetuity. Why only 5 years? Moreover, the the enterprise is a net debtor, it cash is being used to continually pay down debt if it continues to grow. How does one account for that? Thank you.

[@ujku6984]

The reason why I don’t like DCF method is because it has several variables which have to be predicted. Such variables themselves depends from other variables which require other prediction which vary among companies. The final value and the interest rate of discount are actually the killers. Interest rates being really a challenge these days and alternative investment introduce further risks.

[@maureenng2973]

Can I know how do you derive the cash flow amount? Do you consider bank loaned to the company or operating cash flow?

[@stechzm8341]

so do you?

[@thisisbanerjee]

Excellently summed up! 👏🏻

[@borsenchannel8945]

Really very well explained. Thanks

[@aaront1381]

Very nice video. Wished I found this earlier

[@brla259]

Repeating Tim to emphasize - Concerns when using DCF Method to Valuate Companies: Do companies stop in 5 years? Will they stop in 10 years? How accurate are the future cash flows being used? Is your assumed interest rate correct? There's many assumptions being made to utilize this model.

[@dereka8041]

Glad I kept my Finance 530 book. I use it as a reference, from time to time.

[@fatemeazizi1863]

I would like to introduce you to the free online business valuation software of Ratiba . I hope it is useful for your business. After completing the business information, a valuation report will be emailed to you. Online valuation tools in this software are : 1. DCF Method : retiba.com/online-valuation/discounted-cash-flows/ 2. Risk Factors Summation : retiba.com/online-valuation/risk-factors-summation/ 3. Multiples Method : retiba.com/online-valuation/multiples-method/ 4. Score Cards Method : retiba.com/online-valuation/score-cards-method/