Understanding discounted cash flow (DCF)

Valuation metrics are used to comprehensively assess a company's performance, financial health and future prospects. Not surprisingly, both shareholders and creditors hold much interest in these metrics. Like enterprise value, the DCF or discounted cash flow is an absolute valuation method, which means that the end goal is to arrive at a specific rupee valuation. The DCF method is based on one of the strongest and easily understandable principles of finance - the time value of money. In simple words, this principle asserts that the worth of one rupee is more today than tomorrow. Let's take the example of a regular household investment product, the ubiquitous fixed deposit (FD). If you deposit Rs 10 lakh in your FD today at an interest rate of 6 per cent, then the worth of your FD tomorrow would be Rs. 10,00,164. This extra Rs 164 is the additional amount that you have earned in one day. While this is normally called 'interest' and typica

This article was originally published on November 27, 2020.