— DCF Calculator
DISCOUNTED CASHFLOW: DCF CALCULATOR
DCF analysis is a method of valuing a company using the concepts of the time value of money. All future cash flows are estimated and discounted by using the cost of capital to give their present values.
— BEFORE You calculate
WARNING: GARBAGE IN, GARBAGE OUT
Results are only as good as the inputs!
DCF is a very powerful tool for valuing stocks. However, this methodology is only as good as the inputs.
For example, even a small change in inputs (like growth rate or discount rate) can bring large changes in the estimated value of the company. (Try changing these values by 1% or 2%- and you can notice a significant change in the result). In short, if the inputs are not reasonable, the out will also not be correct -‘Garbage in, garbage out’.
Therefore, fill all the inputs carefully as they all have the potential to erode the accuracy in the estimated intrinsic value.
How does this dcf calculator
1. First, you need to enter the current year Free cash flow (FCF) of the company. The DCF model takes the yearly FCF and projects this over 10 years into future by multiplying it with the expected growth rate (please assume a realistic growth rate for the company).
2. Next, it calculates the net present value (NPV) of these cash flows by dividing it by the discount rate. The calculator takes the NPV of the FCF from each of these 10 years and adds them up.
3. The last year FCF is multiplied by the terminal factor (usually between 7 to 12) to find the terminal or sell-off value of the company and added to the original calculations. (Read more about discounted terminal value here).
4. Finally, net cash and debt available on the company’s financial statements are adjusted in the calculations to arrive at the market value estimate of the entire company.
5. When you divide this value with the total number of outstanding shares, you will get the intrinsic value per share of the stock.
(You can read more regarding DCF Valuation here.)
- What is Free Cash Flow (FCF)? Explained in Just 1,000 Words.
- A Complete Guide on Enterprise Value and Equity Value.
- Valuation Basics: What is the Time Value of Money (TVM)?
- How to read the financial statements of a company?
- How To Select A Stock To Invest In Indian Stock Market For Consistent Returns
finding intrinsic value with DCF Calculator!
BalLet’s calculate the Intrinsic value of ITC using the Discounted Cashflow Valuation method. (Please note that all the data used here has been gathered from Trade Brains Portal.)
1. First of all, we will start by finding the free cash flow of ITC, which is the first component of the DCF Calculator. Here, we’ll take the FCF for the last 3 years and consider their average as the reasonable FCF. Now, free cash flow is equal to cash from operating activities minus the capital expenditures. The FCF of ITC for the last three years is equal to Rs 10,576.16 Cr, Rs 15,084.46 and Rs 12,785.97 Cr. The average FCF for last 3 years turns out to be (Rs 38,446.59 Cr/3) = Rs 12,815.53 Cr. (Source: Trade Brains Portal, See: Cash flow Statement –> Free Cashflow)
2. Next, we don’t want to project this free cash flow for perpetuity. We’ll project this FCF only for the next ten years. Although, the company may continue for many more years after the tenth year, however predicting free cash flow for over 10 years is really difficult. Therefore, we assume that the company will sell off all its assets at the end of year ten at a ‘Sell off valuation’. We’ll use a multiplier of 12 for the tenth year cash flow to simulate the value of these cash flows in the case company would sell all its assets (This is a necessary assumption that we need to make in order to find the value of the company).
3. Apart from the cash flows, the next important input is the net cash which the company reflects on its balance sheet. For ITC, this value is equal to Rs 4,659.02 Cr. (Source: Trade Brains Portal, See: Balance Sheet–> Assets–> Cash and Bank Balances)
4. Besides cash, the next essential input is the debt (as debts have to be first paid off and shareholders are last in the line). ITC has a total debt of Rs 5.58 Cr. (Source: Trade Brains Portal, See: Balance Sheet–> Liabilities–> Secured & Unsecured Loans).
5. Next, we need to find the growth rate for ITC. Let’s take a conservative annual growth rate of 12% for ITC company. (Note: To get an idea of the growth rate, you can refer what the analysts are expecting here: Yahoo Finance, See: Growth Estimates (Next 5 years). However, do your own analysis to find the growth rate. Analysts expectations should not be considered precise, but just a rough estimate).
6. Further, just as our fair value calculator assumptions, let’s take a 10% discount rate.
7. In addition, we need the total numbers of outstanding shares. It is equal to 1232.24 Crores. (Source: Trade Brains Portal, See: Current Key Metrics–> Outstanding Shares).
8. Finally, let’s take a margin of safety of 20% on our overall calculated intrinsic value.
After placing the above values in the DCF Calculator, the true intrinsic value per share of ITC turns out to be Rs 214.80 (after a margin of safety of 20% on the final intrinsic price). This is the intrinsic value estimate per share for Indian Tobacco Company at the time of writing using the DCF model (Dec 2021). The current stock price of ITC is at Rs 228.60. This means that this stock is overvalued by over 6.42% right now.
Quick Note: Although this stock may ‘NOT’ be very under-priced currently. However, there are thousands of listed companies in the Indian stock exchange. If you keep looking for great companies, you’ll eventually find good companies which are trading at a decent valuation. Nevertheless, do not overpay for purchasing any company. As Benjamin Graham (father of value investing) used to say- “A good company is not a good investment if you overpay for it”. Happy Investing.
FAQs on DCF Calculator
1. How is DCF calculated?
The DCF Valuation involves valuing a company using the concept of Time Value of Money, where the future cash flows of the company are estimated and discounted by using the cost of capital to find their present value.
This method involves projecting FCF over the assumed time period, calculating the terminal value at the end of that period, and discounting all the FCFs and terminal values using the calculated discount rate to find the Net Present Value (NPV) of the total expected future cash flows of the company.
2. Why is the DCF calculator used?
DCF Calculator is used for calculating the intrinsic value (IV), in other words, the true value of the company. This intrinsic value is the real value of the company based on its cash flows, assets, and financial situation.
Investors should ideally buy the stocks at near the intrinsic value of the company. In addition, you can find whether the company is overvalued or undervalued using the calculated Intrinsic value. If the Intrinsic value of the company is greater than its current share price, it is undervalued. And vice versa, it is overvalued.
3. How do you use a DCF calculator?
You can use the DCF Calculator to find the intrinsic value of stocks. While using the DCF calculator, you have to find and enter the Free Cash Flow (FCF), Expected growth rate, discount rate, and other financial information of the company like total cash, debt, outstanding shares, and more. After entering all these stock data, the DCF calculator will calculate the Intrinsic value of that stock, based on the inputs.
4. What is an Example of a DCF Calculation?
Let’s take a look at an example of DCF calculation to find the intrinsic value. If the Free Cash Flow (FCF) of the company is Rs 3,000 Cr, Total cash is Rs 200 Cr, Total debt is Rs 500 Cr, Total outstanding shares is 150 Cr, the Expected growth rate for the next 10 years is 12%, the discount rate is 10%, and terminal value multiple is 8, along with the margin of safety of 10%, then the intrinsic value of the company will be Rs 370.03.
5. How to find Discounted Cash Flows?
In order to find the discounted cash flows, first, we have to project the future cash flows of the company for the next few years by assuming a yearly growth rate of the company. The terminal value of the company is also calculated for the final year. Then, we have to discount all the future cash flows to the current Net Present Value (NPV), using the discount rate.
6. How do you calculate DCF quickly?
Investors can quickly calculate the DCF to find the intrinsic value of the stocks using the discounted cash flow (DCF) calculator. If you’re looking to find the intrinsic value of Indian stocks, you can use Trade Brains Portal’s DCF Calculator, where all these financial values are available for quick calculation.
7. What is DCF (Discounted Cash Flow)?
DCF is a popular absolute stock valuation calculation technique to find the intrinsic value of the stocks. The discounted cash flow uses the Free cash flow of the company to forecast the future FCFs and discount rate to find its present value. Other than FCF, dividends or EPS are also widely used to find the discounted cash flow.
8. What is FCF (Free Cash Flow)?
Free cash flow is the excess cash that a company is able to generate after spending the money required for its operation or to expand its asset base. It represents the cash that is available for all the investors of the company. This is the cash at the end of the year, after deducting all operating expenses, expenditures, investments, etc and is available for distribution to all stakeholders of a company (Stakeholders include both equity and debt investors.)
9. What is the Growth Rate in DCF?
The growth rate is the expected rate at which the company may grow in the upcoming years. It’s really important to use a realistic growth rate for efficient calculations in a DCF calculator. Else, the calculated intrinsic value might be misleading.
Different investors use different approaches to find the expected growth rate of a company. A few of the common ways are by looking at the historical growth rate for the earnings or revenue, reading the analysts reports to find out what they are forecasting, peeking in the company’s annual report/latest news to find out what growth rate the management is expecting in the upcoming years, etc.
10. What is Discount Rate in DCF calculator?
The discount rate is usually calculated using CAPM (Capital Asset Pricing Model). However, you can also use the discount rate as the rate of return that investors want to earn from the stock. For example, let’s say that you want a return of 12% from stock. Then, you can use it as the discount rate.
As a thumb rule for the discount rate, use a higher value for the discount rate if the stock is riskier and a lower discount rate if the stock is safer (like blue-chip stocks). This rule is in accordance with the principle of the risk-reward which claims a higher reward for a higher risk.
11. What is the Terminal value in DCF?
The terminal value used in DCF calculation is the estimated value of the business after its forecasted period. The terminal value can be calculated either by using the Perpetual growth rate or Exit multiple technique. The exit multiple approach assumes the company is sold at a multiple of a metric (like, EBITDA) based on currently observed comparable trading multiples for similar businesses. For example, we can assume EV/EBITDA as the exit multiple while calculating the DCF.
12. How do you calculate DCF in excel?
You can calculate the DCF in excel by inputting all the values, projecting the future free cash flows using the growth rate, finding the terminal value, and discounting all these values to the present value. You can use this link to download the DCF calculator in excel sheets and quickly calculate the DCF value.