What is a company actually worth? (DCF)
Price is what you pay; value is what you get. A discounted-cash-flow (DCF) model is just a careful way to estimate that value: add up all the cash a business will hand its owners in the future, in today's money. We'll build it one idea at a time, and you can play with every number.
A rupee later is worth less than a rupee now
Would you rather have ₹100 today or ₹100 in five years? Today, obviously — you could put it in an FD and have more than ₹100 by then. So future money must be discounted back to compare it with money today. Play with it:
That shrinking is discounting. Money later is worth less than money now, because money now can be invested (an FD, the market) and grow. The rate you discount by is your required return — higher for riskier or more distant cash.
A business is worth its future cash, in today's money
When you own a company, what you ultimately get is the free cash flow it throws off — the cash left after paying its bills and reinvesting to keep growing. So a company's value is every rupee of future free cash flow, each one discounted back to today and added up. That's the whole idea of a DCF. The next steps just make it practical.
Value = today's-money sum of all future free cash flowStep one: forecast the cash for a few years
You can't forecast forever, so you project free cash flow for a visible window — usually about 10 years — by growing today's figure at a sensible rate. A mature Indian company might grow ~8–12%; a fast one more, but be honest: very few sustain 20%+ for a decade. Each year's cash is then discounted back (Step 1) and these are added up.
Step two: the terminal value (everything after)
The business doesn't stop after year 10. So you bundle "all the years after" into one number — the terminal value — assuming the company then grows slowly and steadily forever (its terminal growth, tied to the long-run economy, so ~4–6% for India). Crucially this growth must be below your discount rate, or the maths blows up. As you'll see next, this one number is usually most of the answer.
Put it together: the DCF calculator
Forecast cash + terminal value, all discounted to today, plus any net cash on the books, divided by the number of shares = intrinsic value per share. The defaults below are a realistic Indian large-cap. Move the sliders — the model is the exact one this app runs on real stocks.
Notice how much of the value sits in the terminal bar — often 60–80%. That's why a DCF is only as good as its assumptions: most of the answer rests on what you guess about the far future. Nudge the discount rate or growth and watch the value jump.
Margin of safety: value vs price
A valuation only helps if you compare it to the price. The gap is your margin of safety.
Our example came out to an intrinsic value of ₹255.00 per share. Now drag the market price:
The margin of safety is your cushion: how far below your estimate of fair value you're buying. Since the estimate itself is uncertain, value investors only buy with a big discount (often 25%+). Buying near or above intrinsic leaves no room to be wrong.
Why a DCF is a range, not a magic number
Two assumptions — growth and the discount rate — drive almost everything. Watch the fair value move as they change. This is the single most important thing to internalise about DCF.
| ↓ Discount Growth → | 8.0% | 10.0% | 12.0% | 14.0% | 16.0% |
|---|---|---|---|---|---|
| 10.0% | ₹270 | ₹315 | ₹367 | ₹428 | ₹498 |
| 11.0% | ₹224 | ₹260 | ₹302 | ₹350 | ₹405 |
| 12.0% | ₹192 | ₹221 | ₹255 | ₹294 | ₹340 |
| 13.0% | ₹167 | ₹192 | ₹220 | ₹253 | ₹291 |
| 14.0% | ₹148 | ₹169 | ₹194 | ₹222 | ₹254 |
Same company, same model — only the two key assumptions move. The fair value swings from under ₹148 to over ₹498. A DCF is a range, never a single magic number. Anyone who quotes one exact target is fooling themselves.
The pro move: reverse the DCF
Because forecasting is hard, flip it around: ask what the current price is already assuming, and judge whether that's realistic.
Flip the question. Instead of guessing growth, type a market price and see what growth that price is silently assuming:
This is the most useful trick for a beginner. You don't need to predict the future — you just ask "is the growth baked into this price believable?" If the price needs 25% growth forever and the company has never grown over 10%, it's priced for a fantasy.
Myth-busters
Tap each. These five trip up almost everyone.
Reading a DCF the Indian way
Roughly the 10-year G-sec (~7%) plus an equity-risk premium (~5%). India's rate is higher than the US because the risk-free rate and inflation are higher — so the same future cash is worth a bit less here.
No company outgrows the economy forever. Tie it to long-run nominal GDP, and always keep it below the discount rate.
DCF suits steady cash compounders (FMCG, IT, quality manufacturers). Skip it for loss-makers, wild cyclicals, and banks/NBFCs.
The easiest way to lie with a DCF is to assume heroic growth. Sanity-check it against the company's actual history and the reverse-DCF.
A company is worth the cash it will hand its owners, in today's money. Forecast the cash, add a terminal value, discount it all back, divide by shares — that's intrinsic value. It's a range, not a number, and most of it hides in the far future, so treat it humbly, demand a margin of safety, and use the reverse-DCF to check what the price already assumes.
Every stock's "Is the price right?" step runs this exact model on live numbers.