27 - How to calculate Intrinsic Value using Discounted Cash Flows (DCF)

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.  Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast.  How to calculate Intrinsic Value using Discounted Cash Flows (DCF) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode27 What is Intrinsic Value? The present value of all future free cash flows produced by a business.  Time Value of Money Cash today is worth more than cash in the future. Therefore, you need to discount future cash flows to be worth less than their stated value.  The simplified discounted cash flow formula Intrinsic Value = Owner's Earnings/(Discount Rate - Growth Rate) Discount Rates: 10% (nominal) or 6.5% (real) Growth Rates: Bounded between 0% and 5% Owner's Earnings: Manually calculated by adjusting Net Income Complex Discounted Cash Flow Calculations When to use: Company is in a high-growth phase of its business (has not yet saturated the market) You are highly confident in short-term projections and the business is predictable Reported earnings have a lot of temporary adjustments that make the next few years not match the long-term When not to use: Almost always Why? Complex calculations can trick you into thinking you have a better understanding of the business than you do You'll likely rely heavily on growth and fast growth assumptions are very risky to make References: Part 1: Episode 23 - Discount Rates Part 2: Episode 25 - Long-Term Growth Rates Part 3: Episode 26 - Owner's Earnings Example Intrinsic Value Reports [$10+/month Patrons receive exclusive access]