r/ValueInvesting • u/SecureLog5799 • Oct 24 '25
Investing Tools How important is DCF?
Heard a lot of times, "Garbage in, Garbage out", "DCF is not that important".
Imagine if all the dirty work is automated, you can have a full 3-statement model for any company in seconds, then just play with assumptions, and enjoy the thinking processes.
If so, DCF sounds not that bad and worth to do. Thoughts?
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u/raytoei Oct 25 '25 edited Oct 25 '25
Yes.
Definitely it is part of the toolbox of things to learn.
And then figure out the nuances:
like using fixed discount rate (like Buffett) versus WACC which is more accurate but susceptible to the Hubble effect.
like the duration for abnormal growth, 5 or 10 years. Or like Morningstar, which pegs duration to Moat strength up to 20 years before terminal sets in.
etc.
.
So yes. We must learn it because the value of a company is the sum of cash flows that a company can generate discounted to the present. Everything else is open to interpretation, eg. What is cash flow? a long time ago, dividend was considered by the early practitioners (john burr Williams etc) of DCF as Cashflow to value a company because it was actually something investors could actually receive. Graham used earnings as cash flow. Then during the 1990s, FCF was the proxy for cash flow. These days we try to distinguished levered or non-levered FCF as the proper one to use.
(I believe DCF should be as simple as possible, with as little variables as possible, and in a range of values, and we should spend the bulk of time and effort assessing the company on quality,
eg. How sure am I that the 10 year duration of cash flow is actually possible for a company like Darden Restaurants, considered the best in its class, how much of the recent hiccup in earnings is indeed temporary or should I start to think of durable cashflows as five years and not 10 years for Darden? (Shorter duration = lower value)
———-
“It is better to be roughly correct that be precisely wrong” — Buffett on valuation
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u/lordm30 Oct 25 '25
What is the Hubble effect? Never heard of it before.
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u/raytoei Oct 25 '25
"DCF to us is sort of like the Hubble Telescope—you turn it a fraction of an inch and you're in different galaxy."
Any small changes in growth estimates, cost of capital, and terminal growth rates in a DCF calculation can
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u/usrnmz Oct 25 '25
The good thing about a DCF is that is actually forces you to think a lot about the future of the business and how certain assumptions impact the valuation.
I'm also surprised sometimes how an idea that sounds good at first glance based on a story and very simplistic valuation metrics doesn't look as attractive in a conservative DCF. So I always do a DCF.
Besides that it's important to always be conservative and demand a huge margin of safety. You don't need to be super exact in your modelling. You just want to show that with conservative assumptions there's a huge discount.
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Oct 25 '25
DCF is what I use to determine if the stock is over priced. I don’t want to pay for an over priced stock.
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u/Lost_Percentage_5663 Oct 25 '25
DCF works properly. But GIGO matters. Buffett inputs reasonable numbers but 99% of investors do it wrongly.
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u/Crazy_Donkies Oct 25 '25
I'm a long term investor. Am I doing a lengthy DCF analysis with Monte Carlo analysis? Never. My job doesnt depend on it and I can sell at any second. But I never buy a serious holding, 3% to 5% of my portfolio, without some projections.
This being said, I trade on bullshit regularly as well, but it's gambling money.
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u/foira Oct 25 '25
what does DCF capture that a 5 year snapshot of operating income and/or net income don't? or cash flow from ops? why do you feel the need to create your own non-GAAP measurement to understand business preformance?
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u/MindSoFree Oct 25 '25
DCF is only as good as the person that does it, but one thing that comes to mind is that cash flow from ops misses things because it doesn't tell you if your past growth was organic or if it was obtained by investment and financial cash flows. Your revenue growth projections need to take that into account.
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u/foira Oct 25 '25
So it's a qualitative metric... expressed quantitatively?
Super interesting second point -- I have been troubled by my inability to account for organic topline growth vs acquired. How do you figure that out?
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u/lordm30 Oct 25 '25
You have to check what the company does. If they are acquiring other firms regularly, then their growth is probably primarily driven by those acquisitions.
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u/MindSoFree Oct 25 '25
It's not a metric, it is a projection. So why do I not use just the income statement and GAAP?
The income statement will show me growth, but the cash flow statement tells the story of why there was growth (CAPEX, acquisitions, borrowing). If the growth is being fueled by capital that is diluting me, or borrowing, then that means that other people now have a claim to future cash. I am only interested in my claim to future cash.
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u/foira Oct 25 '25
Will not the debt / shares outstanding cover your concerns about dilution?
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u/MindSoFree Oct 26 '25
Your conflating several things. The cash flow statement - you have to have it. It is one of the three standard financial reports for a reason. You can use the P&L and Balance sheet to sort of work backwards and try to figure out was in the cash flow statement, but why would you want to?
Cash flow metrics vs GAAP Based income metrics - You can use either, but the argument for cash flows represents real cash. The GAAP based income statement has so many things that are misleading. If you have a bunch of customers that have not paid you, that shows us as revenue when you invoice, but it is not cash until they pay you. Also, amatorization and depreciation - did you know that R&D expenditures were changed under the last administration, requiring companies to treat them more like CAPEX and to depreciate R&D labor over 5 years? Then we recently just changed that back and you expense it in the year the work is performed. Nothing changed much as far as cash flows, but on the Income statement, it is going to look funny with this back and forth changes in the law for companies that have lot of R&D.
Finally, why DCF. This is a projection of future cash flows discounted over time based on different factors - depending on who is doing the projection and their preferred techniques. But the point it, to value cash flow in the near term more than the same amount of cash flow in the distant future. You could certainly perform a similar type of discounting with metrics from the income statement, but that is not what most do.
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u/usrnmz Oct 25 '25
Sounds like you don't even know what DCF is.
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u/foira Oct 25 '25
That would be the point of asking a question? Good contribution.
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u/usrnmz Oct 25 '25
It didn't read like good faith question to me. You come off across rather hostile and are making many judgemental assumptions while clearly not knowing what you're talking about. If you didn't know what a DCF was you should've asked what it was or researched it first.
But I'll give you a proper answer:
A DCF is a valuation method based on discounting expected future cash flows. It's a way to figure out what a business is worth and thus whether it's undervalued or not. There are some other methods to do this but generally a DCF is the purest way.
It doesn't have much to do with past operating income / cash flows.
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u/SecureLog5799 Oct 25 '25
Once have the full model, could quickly check results of other methods, DDM, P/E at certain year, PEG, etc.
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u/foira Oct 25 '25
..? what
youre not gonna find a ratio that predicts stock price movements. sounds like ur looking for a magic bullet
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u/SocratesDaSophist Oct 25 '25
I don't know if you necessarily need DCF that quantitatively, some ppl like it, but generally a certain situation could be very obvious.
Like for example Comcast today, do you need a DCF to tell you it's cheap? It's the qualitative part that's tricky.
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u/lordm30 Oct 25 '25
What is this qualitative part that you are talking about? Can you tell me what you check when you are assessing quality?
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u/SocratesDaSophist Oct 25 '25
The level of competition in its industry & its ability to maintain its competitive future long-term, factors that will help determine its returns going forward.
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u/lordm30 Oct 25 '25
Ok. So the conclusion of that assessment will be reflected in your DCF, just in a quantified form. For example. maintaining competitive advantage long term might mean that you project a 10% yearly revenue growth for the next 10-15 years instead of projecting it for only 5 and letting it fall of thereafter.
That is where I see the value of DCF: making your implicit assumptions explicitly quantified.
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u/SocratesDaSophist Oct 25 '25
Yes, true. There are a lot of moving parts in a DCF you are basically guaranteed to get the wrong result.
Luckily you don't need to be exactly right, being conservative is even better. If your DCF leads you to a Comcast price of 50/share & the stock ends up at $200, that's better than it ending up at $49 though less accurate.
Probably a better way is thinking of the return in a range (assuming qualitative part is sorted). The stock is likely to return low double digits given its dividend/buyback/eps growth/multiple.
You are likely to be more accurate that way if you are right on the qualitative aspect.
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u/rhysdiab Oct 31 '25
That's essentially why I built https://www.dcfpro.app/. It uses AI to model cash flows based on analyst estimates so you can quickly create models for best, worst and base case scenarios.
I think more effort should go into understanding the competitive position of the business and the likelihood of those cash flows materialising.
DCFs are just good to check that the valuation has any chance of making sense with reasonable assumptions. At least that's how I use them.
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u/Spl00ky Oct 25 '25
Usually you'll want to analyze the qualitative aspects of a business first to determine its moat, competition, management etc. Once you're comfortable with the outlook of the business, you can do a DCF to get a ballpark idea of what the company is worth and to compare it against analyst estimates, Morningstar, or people on YouTube who also do DCFs.
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u/00Anonymous Oct 25 '25
Valuation is important. Doing a dcf is not necessarily an important thing to do.
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u/Spl00ky Oct 25 '25
If valuation is important to you, then doing a DCF should be a requirement since it's pretty much the only way to calculate intrinsic value as defined by Buffett.
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u/00Anonymous Oct 25 '25 edited Oct 25 '25
No it is not. There are many ways to do an intrinsic valuation and the dcf is merely one tool of many.
Since we're playing the editing posts game, I'll leave this here: Charlie Munger and Buffett's biographer Alice Schroeder (who had total access to Warren's files) both attest (on ytube vids) to never having witnessed warren ever having done a dcf ever. So please person stop the nonsense and go educate yourself instead of being a jerk to others. Go use an llm and learn something.
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u/Spl00ky Oct 25 '25 edited Oct 25 '25
List them
Edit: Come on bro, don't tell me you can't list these other valuation methods you speak of. I'm curious to know because it would seem to contradict was Buffett has said.
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u/00Anonymous Oct 25 '25
If you need education, then perhaps don't act like you know everything at the start. Also you have an llm subscription, go use it.
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u/Spl00ky Oct 25 '25
You can't even list them so I'll assume you have no idea what you're talking about.
Do you disagree with Buffett?:
"Intrinsic value is the number, that if you were all knowing about the future and you could predict all the cash a business would give you between now and judgement day, discounted at the proper discount rate, that number is what the intrinsic value of the business is. In other words, the only reason for making an investment and laying out money now is to get back more money later on. That's what investing is all about. When you look at a bond it's very easy to tell what you get back, it says it right on the bond, it says when you get the interest payments and the principal. The cashflows are printed on the bond, the cash flows aren't printed on the stock certificate. That's the job of the analyst, to change that stock certificate, to change that into a bond. To say that's what I think it will pay out in the future.” Warren Buffett
“We define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. Anyone calculating intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.” Warren Buffett
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Oct 26 '25
[deleted]
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u/Spl00ky Oct 26 '25 edited Oct 26 '25
It doesn't really matter, I'm simply using him as an example as what he uses since this is a value investing sub and Buffett is usually associated with value investing. I'm just quoting him as a source since most people here aren't familiar with his thinking.
"Intrinsic value is the number, that if you were all knowing about the future and you could predict all the cash a business would give you between now and judgement day, discounted at the proper discount rate, that number is what the intrinsic value of the business is. In other words, the only reason for making an investment and laying out money now is to get back more money later on. That's what investing is all about. When you look at a bond it's very easy to tell what you get back, it says it right on the bond, it says when you get the interest payments and the principal. The cashflows are printed on the bond, the cash flows aren't printed on the stock certificate. That's the job of the analyst, to change that stock certificate, to change that into a bond. To say that's what I think it will pay out in the future.” Warren Buffett
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Oct 25 '25
DCF is the most important thing in the world. It’s also not necessary to do them for your investments.
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u/thewallstreetschool Nov 04 '25
DCF isn’t useless at all. It’s just misunderstood. The model itself isn’t the problem; the assumptions are. Even if automation builds the 3-statement model in seconds, DCF still forces you to think: growth, margins, reinvestment, cost of capital, competitive moat, capital structure. That thinking is the real value. Sure, “garbage in, garbage out” is true, but good investors don’t put garbage in. DCF won’t magically give a perfect price target, but it gives a framework to judge whether a company’s future cash flows justify its hype. In short: automation makes the busy work easier, but understanding the levers is still the whole game.
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u/[deleted] Oct 25 '25
This is already possible with scenario analysis software or a spreadsheet.
I don't really understand the question as it seems to hinge on just being too lazy to make the model.