Understanding Discounted Free Cash Flow - DCF Questions and Answers

DCF Guide: • Discounted Cash Flow -...
What is Free Cash Flow: • What is Free Cash Flow...
In this video, I go through some common questions and answers I get about discounted free cash flow (DCF).
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DISCLAIMER: I am not a financial advisor. These videos are for educational purposes only. Investing of any kind involves risk. Your investments are solely your responsibility and we do not provide personalized investment advice. It is crucial that you conduct your own research. I am merely sharing my opinion with no guarantee of gains or losses on investments. Please consult your financial or tax professional prior to making an investment.
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[@jackythum4442]

As a engineering college student taking a course in finance, your content is really simple to understand for beginners and I can relate to it! Keep up the amazing job Jimmy :)

[@alexzabiuk1361]

Just a tip for you Jimmy- I've noticed a lot of other financial youtubers avoid saying 'coronavirus' at all costs because it gets their videos demonitized. Not sure if your videos don't have ads on purpose or if that's demonitization but you provide us with a lot of value and deserve to make a profit from your videos.

[@mandomunoz7367]

I agree, but i wouldn't be surprised if he chooses to not put ads just to make it more convenient for us. Jimmy is a different kind of person 💪

[@800pizza1]

Amazing as always and perfect lighting today

[@millennialoutrage1793]

Jimmy I love you man! You are doing such an amazing job! Thank you for educating us - the crowd.

[@MonsieurDee]

I just want to thank you for making these videos. I don't have any type of accounting background. (powerline worker lol) I read the 10k's, 10q's, earnings calls, balance sheet. But the cash flow and income statement is what I struggle with. (how to analyze them).thanks.

[@sagig72]

GREAT Video Jimmy !!

[@junpengxiao4924]

Thanks for sharing. love your channel

[@rubend716]

Great video, love your work!!

[@quofintech9200]

Thanks Jim, great video !! as usual....

[@shanecoble1325]

Thanks for the video Jimmy Appreciate your efforts and the content. I always learn something. Happy investing

[@davidezappa1983]

This video is so clear and accurate 👏

[@ldaej]

Great video, I've learned so much from you

[@porpentosa]

I just discovered your channel, I've watched a couple videos; it is unbelievably good.

[@jonnyrob440]

Well done thanks jimmy

[@NexoticHD]

Thank you Jimmy!

[@cricbuzz1123]

Thanks man. I had to stop my morning run for a lil bit to pay attention 🙃

[@CSRParkour]

Simply perfect

[@stoyanminev1714]

Hi, Jimmy, very good explanation, well done!

[@bdonunezn6593]

Thanks man. I really appreciate this video.

[@surenderyadav7738]

Please make a video on FCFF and FCFE 😁 Btw love your videos and how simply you explain these concepts.

[@BringTheRains]

Thank you Jimmy

[@walterconn5637]

Thank you, I am learning something new every day.

[@anthony01571]

Thank you : ) ........ As always, I learn so much from your posts : ) ........ Peace on Earth FOREVER : ) ........

[@makemoneysecrets6182]

Haven't even watched the video yet but i know it's going to be great!

[@Jeff-ps5tg]

You are correct!

[@Rajeshkumar-li2dn]

Wow! You nailed it, man.

[@vincentcorleone8643]

Always great content. Thanks bro 👍🏿. They should have you on Bloomberg or CNBC.

[@herotiramisu]

Great as usual, thanks for your effort....... Great video....

[@jkj1459]

You have done all the very best to make others understand . But who found such assumptions ? That thy knew that many would not understand and they can take advantage of poor . And poor in understanding 🙇‍♀️

[@jhan944]

There's a lot of value in every video you post, congrats. By the way at 15:10 the price per share is incorrect, but it is not relevant for the point you made

[@LearntoInvest]

Good catch. I had the decimal in the wrong place there. Sorry about that! And thanks for the kind words 🙂👍

[@tamayo1607]

Hi Jimmy, first thanks for all you do, invaluable. What is your best source for analyst estimates and forecast?

[@couchgamer4401]

hi jimmy love your work can u cover spotify stock next?

[@eduardochavez7768]

Ok, your first video was amazing, I think it would be very helpful to Start ups to know how to calculate value (based on projections) for a brand new company, or a very new one, that only has very limited financial information. Maybe it doesnt have debt, how can we calculate its Beta. Often to draw in investment, investors require a projected valuation, even if its on projected earnings, but still need a somewhat substantiated (at least process wise) valuation.

[@DrOSami]

I get notification about this video on my phone 2 days ago. I liked it and saved and watching now during the weekend. Thanks Jimmy

[@LearntoInvest]

I will do that, that's a good idea

[@bevansmith3210]

Hi Jimmy, thanks for the videos. Could you perhaps do an analysis of Phil Town's evaluation method of predicting future P/E value (in ten years) then calculating what the current P/E is. Could you possibly compare this with the DCF method? Thanks for the excellent videos.

[@courtneyt6156]

Jimmy, Where are you obtaining analysts estimates of future free cash flows? Thank you!

[@MrFlamehead131]

how do you decide on the growth rate for FCF? Do you go off of analyst's estimates (if so what's your preferred site) or do you use a fundamental growth rate?

[@bryanpatton7067]

Jimmy- HI, I have a hearing problem, and I usually watch with the CC (closed caption) turned on. Well, your CC is in this video is in Dutch. Can you please fix this. -Thanks, Bryan.

[@LearntoInvest]

I'm so sorry, I'll fix it asap ... I wonder how dutch happened?? Sorry about that

[@luukdehaan4661]

@@LearntoInvest het is een mooie taal

[@mustafaagbaria1410]

@@luukdehaan4661 G E K O N O L I S E E R D

[@luukdehaan4661]

@@mustafaagbaria1410 ik denk dat onze overheid bezig is langzaam te integreren in big tech bedrijven als Google, daarom doe ik niet meer mee

[@mustafaagbaria1410]

@@luukdehaan4661 free de pipo

[@enderuzal9021]

Great video, thank you! How does 1000 minus 90.91 equal 818 in your example of negative free cash flow though? Am I missing something?

[@robinhuijbregts6011]

Hey Jimmy, How would you calculate new borrowings?

[@sawlanivijay4359]

Jim Please make video on Tech Stock Valuation and which ratio can tell us about Valuations of Tech Stock i.e Book Value or P/E

[@JY88168]

Hey jimmy would it be more accurate to use fcf to equity (since it’s after debt repayments) to make future fcf projections instead of simply using operating cf - capex

[@giancarlodelgrande3949]

Hi Jimmy, how do I evaluate REITs ? So I can better decide which one will be the best investment in the long run? Thanks

[@sarud4562]

Hi Jimmy, is there a possibility to do a video on options please, it would be an amazing video with all of the knowledge you have in that sector of trading?

[@jaffrayburk1]

Risky, but I wouldn't mind a video either. Here are two investments I use right now for the crazy market. SH' pretty much is the S&P 500 and options to short the market (if the market goes down, this goes up), and QYLD' which is basically the NASDAQ with call options (if the market goes up, it goes up more, but more of a dividend high fund)

[@sarud4562]

jaffrayburk1 thanks mate

[@36boys.]

Hello Jimmy. I can't figure out how to calculate net borrowing

[@mohammadameenesafi3815]

What about deducting only capital expenditures of maintenance from operating cash flow instead of deducting all Capex. Warren Buffet calls that owner’s earnings. What is your opinion on that. 🤔

[@staskim2331]

Jimmy, thank you for very useful video! Jimmy, what do you think about water companies such as AWK, Middlesex Water Company or York water company. Is this a good investment on 5-10 years horizon. Would be great if you will make a video about new opportunities on the market in 5-10 years timeline. Thank you once again

[@crickygta7297]

Can I use the dcf method even if the analysts predict a negative growth rate?

[@shanewilson661]

Man I wish I was smart enough to understand half of what you were saying most of the time ha ha

[@sagig72]

On that topic, I'll more than appreciate if you follow up with a few videos valuing a number of companies, it is probably especially useful now that there's a correction in the market. Hopefully if folks like that, then like this comment to get Jimmy's attention and perhaps reply with a few suggested stocks to analyze.

[@myaparker]

i do that on my channel

[@sagig72]

@@myaparker Nice! Thank you. I'll check it out.

[@Allen-L-Canada]

Good point: most research website only give 3-5 years of growth projection. Doing 10 years is bit harder.

[@MrFlamehead131]

most of the time most analysts only project 3-5 years of growth and if it is a young company and needs longer to project growth they just taper the growth off until it reaches its terminal value. Still not an easy thing to do and you make a lot of assumptions but that's what normally happens on wall street.

[@Allen-L-Canada]

@@MrFlamehead131 Mmmm, I often see most of the Dow 30 companies got only 3-5 years of growth forecasts from Yahoo, Finviz, Fidelity. So not just the young companies.

[@derickharris9273]

Why does a higher discount rate, lower the PV?

[@Jeff-ps5tg]

Can someone explain to me why some people subtract debt from the intrinsic value before dividing by the share count to find price? I see Jimmy hasn't done this.

[@jeanLetourneau1]

Great video ! You answer all my questions except one. Can we use EBITDA instead on FCF? Often, EBITDA appears to be less volatil over years than FCF.

[@LearntoInvest]

Sure, that sounds like that would work well. I've never tried it, but yes- it sounds like it would work

[@quofintech9200]

If you are analyzing a company that have huge working capital needs, using EBITDA could be misleading, making the valuation higher than it should be

[@tolkien11]

Why dont you add the retained cash to your value at the end of your cash flow calculations?

[@arteinvertir5188]

Hi Jimmy, Wanted to ask about the Rf noticed that you take directly the value of Treasury Yield 10 Years but this is not adjusted to inflation as per Risk Free Rate = (1+ Government Note Rate)/ (1+Inflation Rate)-1 Could you explain the reason? with current T-notes R of 1.57% and inflation of 1.25% the expected Real Risk Free Return should be 0.31% instead of 1.57% Good job with the videos! Regards

[@Berebuna]

Hello , Jimmy. Congrats on the channel, your content is priceless to me. I have a question regarding the FCF estimates : from which websites/ analists are you taking the FCF estimates ? I am trying out your excel template for different companies and would help me a lot to know your sources. Keep it up.

[@eduardochavez7768]

Yahoo Finance

[@Iseria555]

There is a lot of research about comparison of DCF and RIM. Which do you prefer？

[@wilsonmanuel2297]

Hi Jimmy, where do you normally go to find analyst estimates? If it is from a paid subscription, which website do you think offers the best service for their price?

[@ckelvin2079]

he usually just go to yahoo finance for the number

[@rsam638]

Hello Jimmy, great video. There is a FCF given in the cash flow statement. Is this any good and can this be used instead of working out the FCF?

[@hugomeza2910]

There is? In the cash flow statements of public companies?

[@Gustavo-so7zk]

Hugo Meza FCF is a non-G.A.A.P metric so it’s not required to be released by the SEC, but some companies release it in their financial statements anyway.

[@hugomeza2910]

Kasparov Against the World yes I’ve seen it on some 10k reports. Facebook has always reported they’re FCF. But I’ve never seen it on an actual Cashflow Statement.

[@ivanl8408]

14:40 question am I wrong "1636 ÷100 = 16.36" Question Am I supposed to move the decimal over one spot? and if so why. Jimmy please help me i'm trying to understand the math

[@nunofreitas8838]

How you reached to the $1,908 number?

[@DanteCry23]

Which is the method for irregular FCF? I'm working on a project which its 3 first years are negative (outflows) because is just investment and from year 4 onwards positive cash flows. Can I use this method in that scenario? Thank you! Great video!

[@richardah12]

I would use another method, DFCF is best usually with blue chip stocks with predictable cash flow. I've tried it with a few companies in their infancy and it doesn't work, especially if predicted growth is large

[@DanteCry23]

richardah12 which methods would you use?

[@quofintech9200]

@@richardah12 i don't see why not...what's the difference if the predicted growth is large? DFCF is used for basically every investment project analysis and private business valuations. imho, If it was only useful for blue chips it would be almost useless...

[@pres8585]

so Jimmy, for analyst estimates what are reliable resources you tend to go to.

[@pres8585]

Also, how do you recommend evaluating utilities. DCF doesn't seem to be a good method for these types of companies given their high required payout rate.

[@dontfrybaconnaked]

CapitalExpenditures are negative on the cash flow statement. Subtract the negative (thus adding)? Or subtract the absolute value?

[@LearntoInvest]

Subtract the absolute value 😀👍

[@dontfrybaconnaked]

@@LearntoInvest Thanks boss

[@faithfulalabi1522]

Hey Jimmy, I turned your DCF calculation video into code and was able to get it working for any company using an API. One thing I noticed using the WACC formula with the current 10yr treasury rate is that the return rate was very low resulting in the purchase price of the company being very high, for example Walmart returned a purchase price of $1,600 based off the WACC formula. Do you know the explanation for this?

[@quofintech9200]

just thank the FED for inflating asset prices :) Being just curious, what was your WACC?

[@chiraggoswami7270]

If the FCF is negative, then which other method do you find to be the most helpful?

[@LearntoInvest]

In that case I might go for something like EV to EBITDA, it really depends on the situation

[@Roy_0692]

hi jimmy great video, i have a question. what if the total debt of the company exceeds the market cap? Which means that our WACC will be negative since the weighted cost of debt will be more than 1. How can we counter this? thanks!

[@Gustavo-so7zk]

If the total debt of the company exceeds the market cap you run as far as you possibly can from the company 😂. In all seriousness I have no clue.

[@Roy_0692]

@@Gustavo-so7zk hi there, think it is the nature of the business. The said company is a property developer. Hence the use of debt to facilitate purchases of assets is common. So wanted to know how to value these kind of companies.

[@quofintech9200]

Why your WACC would be negative?

[@serkanbasatan7856]

Hi! A newbie question: If I for example valuing a Swedish company, (MSEK) do I need to convert the financial info from SEK to USD so that the template works accurately? If so, where can I calculate correctly so the numbers isn’t go all crazy? Thanks!

[@LearntoInvest]

You can keep everything in SEK if you want. The key is to make sure everything is in the same currency, once you do that, the formula works the same

[@serkanbasatan7856]

@@LearntoInvest Thanks for the fast answer!👍🏻

[@user-wb6gh5tg6w]

Stocks extended their year-to-date rally following the CPI report, with the S&P 500 last up 0.8% in afternoon trading. but I don't know if stocks will quickly rebound, continue to pull back or move sideways for a few weeks, or if conditions will rapidly deteriorate.I am under pressure to grow my reserve of $250k.

[@biradarsridhar5667]

Why only operation's and investment's cash flows are used to calculate free cash flows why don't we consider cash flows from financing activities in that calculation?

[@venkatnani5666]

Hi Jimmy plz explain Npv IRR Fv Time value of money Payback period

[@quofintech9200]

well, i think he just did...NPV is today's value (1,000), IRR is the required return 10% (in this sampe). time value of money is the concept that your money in the future worth less than today...e.g., value 100 in the 5th year equals 62 in present value.

[@willbond8377]

I may be being stupid but can you or anyone explain why today’s value is less than the original number. I understand the maths behind it I just don’t get why in year one you receive 100 which is worth 90.91

[@mrsdbrc]

14:50 is he wrong or me? 1636 / 100 = 16,36 per share not 163?

[@LearntoInvest]

Lol, your 100% correct. That was my mistake, I apologize.

[@mrsdbrc]

I almost believed you... 😜

[@mrsdbrc]

@@LearntoInvest Can you please tell me where can I find the excel template for the DCF model? email is delimar.ibric at hotmail dot com. Thanks in advance Mirsad Belgium

[@zaphrode4110]

dude idk if its supposed to be as complicated as you make it sound

[@Yamboist]

Because this is not the beginner video. Look up his first one, it's better.

[@FiratGameslive]

I emailed you 4 times you haven't sent the DCF model

[@LearntoInvest]

What's your email?

[@FiratGameslive]

I sent a email to the website like an hour ago again if you want to check your inbox

[@LearntoInvest]

@@FiratGameslive I'll take a peek and get back to you ASAP

[@FiratGameslive]

@@LearntoInvest thank you

[@carlorappa5526]

@@LearntoInvest same for me. I sent few times but no reply

[@andrewstoehr]

The world's most forthcoming adult person

[@sleeya]

I am confused :(

[@freewind1977]

Thank you Jimmy