By Charlie Wang, Founder of MiniValuator · Updated March 2026
A step-by-step guide to stock valuation using the Discounted Cash Flow method, trusted by analysts and value investors.
Discounted Cash Flow (DCF) analysis is the most widely used stock valuation method — it estimates a company’s intrinsic value by projecting its future free cash flows and discounting them back to present value. Originally formalized by John Burr Williams in The Theory of Investment Value (1938), DCF remains the gold standard in stock valuation used by investment banks, equity research analysts, and value investors worldwide. MiniValuator implements a two-stage DCF model that you can run on any US-listed stock in under 60 seconds.
The core stock valuation formula calculates enterprise value as the sum of discounted future cash flows:
Intrinsic Value = Σ [FCFₜ / (1 + r)ᵗ] + [Terminal Value / (1 + r)ⁿ]
Where:
Collect the company's latest free cash flow (FCF), revenue growth rate, and capital structure data from financial statements or data providers. Accurate data is the foundation of any reliable stock valuation.
Forecast free cash flows for an explicit period (typically 5-10 years) using estimated growth rates. Apply different rates for high-growth and stable phases in your stock valuation model.
Estimate the value beyond the forecast period using either the perpetuity growth model (Gordon Growth) or an exit multiple method. Terminal value is often the largest component of a stock valuation.
Calculate the Weighted Average Cost of Capital by combining the cost of equity (via CAPM) and cost of debt, weighted by the capital structure. The discount rate is a critical input for any stock valuation model.
Discount each projected cash flow and the terminal value back to present value using the WACC as the discount rate. This step converts future earnings into today's stock valuation.
Sum all discounted cash flows to get enterprise value. Subtract net debt, then divide by shares outstanding to get intrinsic value per share — the ultimate output of a DCF stock valuation.
Compare intrinsic value to the current market price. A margin of safety of 20-30% or more is a key indicator in stock valuation that the stock may be undervalued.
Where g is the long-term growth rate (typically 2-3%, aligned with GDP growth). This method assumes the company grows at a constant rate forever and is a foundational concept in stock valuation.
Uses a comparable company multiple (typically 10x-20x for mature companies) applied to the final year’s cash flow. This stock valuation approach is often preferred when comparable transaction data is available.
The Weighted Average Cost of Capital represents the minimum return a company must earn to satisfy all capital providers. It serves as the discount rate in stock valuation models:
For most large-cap US stocks, WACC falls between 8% and 12% — a critical input for stock valuation. Aswath Damodaran (NYU Stern) publishes updated industry WACC estimates at his website.
Because stock valuation results are highly sensitive to assumptions, it is critical to test how intrinsic value changes when inputs vary. MiniValuator’s sensitivity heatmap automatically shows how the stock valuation shifts across a matrix of growth rates and discount rates, helping you identify a reasonable range rather than a single point estimate.
Looking for earnings-based stock valuation? PE Methodology — Learn how to value stocks using PE ratio analysis.
Explore key terms used in stock valuation and DCF analysis: Intrinsic Value, Free Cash Flow, WACC, Terminal Value, Margin of Safety, Net Present Value.See the full Financial Glossary.
Ready to run your own stock valuation? Open the Stock Valuation Calculator — enter any US stock ticker and get an intrinsic value estimate with sensitivity analysis in under 60 seconds. Start with 50 free credits.
DCF is a stock valuation method that estimates the present value of a stock based on its expected future cash flows, discounted at an appropriate rate.
The most common discount rate for DCF stock valuation is the Weighted Average Cost of Capital (WACC), typically ranging from 8% to 12% for most companies. Higher-risk companies warrant higher discount rates.
Stock valuation accuracy using DCF depends heavily on the quality of assumptions. Small changes in growth rate or discount rate can significantly impact the result, which is why sensitivity analysis is crucial.
Terminal value represents the value of a business beyond the explicit forecast period. It often accounts for 60-80% of total DCF stock valuation result and can be calculated using the perpetuity growth method or exit multiple method.
Margin of safety is the difference between a stock's intrinsic value and its market price, expressed as a percentage. It is a core principle in stock valuation — Warren Buffett recommends buying only when there is a significant margin of safety (typically 20-30%+).
References: Williams, J.B. (1938). The Theory of Investment Value. Damodaran, A. (2012). Investment Valuation, 3rd Ed., Wiley. CFA Institute (2025). Equity Asset Valuation.
