Intrinsic Value Calculator (DCF Model)
Use this calculator to estimate the intrinsic value of a company's stock based on the Discounted Cash Flow (DCF) model. This method projects a company's future free cash flows and discounts them back to their present value to arrive at a valuation.
The company's free cash flow for the most recent fiscal year.
The number of years for which you expect the company to experience a higher growth rate.
The annual growth rate of FCF during the high growth period (e.g., 10 for 10%).
The perpetual growth rate of FCF after the high growth period (e.g., 2 for 2%). This is typically a low, sustainable rate.
The Weighted Average Cost of Capital (WACC), representing the required rate of return (e.g., 9 for 9%).
The total number of common shares currently outstanding.
Total cash and cash equivalents on the company's balance sheet.
Total short-term and long-term debt on the company's balance sheet.
Calculation Results:
Enter values and click "Calculate Intrinsic Value" to see the results.
Understanding Intrinsic Value and the DCF Model
Intrinsic value refers to the true, underlying worth of an asset, particularly a stock, based on its fundamental characteristics rather than its market price. For investors, understanding intrinsic value is crucial because it helps identify whether a stock is undervalued (trading below its intrinsic value) or overvalued (trading above its intrinsic value).
What is the Discounted Cash Flow (DCF) Model?
The Discounted Cash Flow (DCF) model is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses projected future free cash flows (FCF) and discounts them back to the present day to arrive at a present value estimate, which is then used to determine the investment's potential. If the DCF value is higher than the current cost of the investment, the opportunity could be seen as a good one.
Key Components of the DCF Model Explained:
1. Current Free Cash Flow (FCF)
Free Cash Flow represents the cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets. It's the cash available to distribute to all security holders (debt and equity). A positive and growing FCF is a strong indicator of a healthy business.
2. High Growth Period (Years) & High Growth Rate
Companies often experience a period of higher growth early in their lifecycle or due to specific market conditions. This input defines how many years you expect this elevated growth to continue and at what annual rate. This period is typically 5-10 years, reflecting a company's competitive advantage or market expansion.
3. Terminal Growth Rate
After the initial high growth phase, it's assumed that a company's growth will stabilize to a more sustainable, perpetual rate. The terminal growth rate is usually a low, conservative figure, often aligned with the long-term inflation rate or GDP growth rate of the economy in which the company operates (e.g., 1-3%). It's crucial that the terminal growth rate is less than the discount rate; otherwise, the terminal value calculation becomes mathematically unsound.
4. Discount Rate (WACC)
The discount rate is used to bring future cash flows back to their present value. It represents the required rate of return an investor expects to earn for taking on the risk of investing in the company. The most common discount rate used in DCF is the Weighted Average Cost of Capital (WACC). WACC accounts for the cost of both equity and debt, weighted by their proportion in the company's capital structure. A higher discount rate implies higher risk or higher opportunity cost, leading to a lower intrinsic value.
5. Shares Outstanding
This is the total number of a company's shares currently held by all its shareholders, including institutional investors and restricted shares owned by the company's officers and insiders. It's used to convert the total equity value into a per-share value.
6. Cash & Equivalents
Cash and cash equivalents are highly liquid assets that can be readily converted into cash. These are added to the enterprise value because they represent non-operating assets that contribute to the company's overall value and can be used to pay down debt or distribute to shareholders.
7. Total Debt
Total debt includes all short-term and long-term financial obligations of the company. Since the DCF model typically calculates the Enterprise Value (value to all capital providers), debt must be subtracted to arrive at the Equity Value (value attributable only to shareholders).
How the Calculator Works (Simplified DCF Steps):
- Project Free Cash Flows: The calculator projects the FCF for each year of the high growth period using the current FCF and the high growth rate.
- Calculate Present Value of Projected FCFs: Each projected FCF is discounted back to its present value using the discount rate.
- Calculate Terminal Value: At the end of the high growth period, a terminal value is calculated. This represents the value of all cash flows beyond the high growth period, growing at the terminal growth rate indefinitely.
- Calculate Present Value of Terminal Value: The terminal value is also discounted back to the present.
- Determine Enterprise Value: The sum of the present values of all projected FCFs and the present value of the terminal value gives the Enterprise Value.
- Calculate Equity Value: Cash and equivalents are added to the Enterprise Value, and total debt is subtracted to arrive at the Equity Value.
- Calculate Intrinsic Value Per Share: Finally, the Equity Value is divided by the number of shares outstanding to get the intrinsic value per share.
Remember, the DCF model is sensitive to its inputs. Small changes in growth rates or the discount rate can significantly alter the intrinsic value. It's best used as one of several valuation tools and with a thorough understanding of the company's business and industry.