CluenexDCF calculator
How do I calculate the fair value of a stock with a DCF?
A discounted cash flow (DCF) model adds up the free cash flow a company should earn in the future, discounted back to today. Enter free cash flow per share, how fast it grows, and the return you require. The calculator gives a fair value per share, a buy price after your margin of safety, and a reverse DCF: the growth rate today's price already assumes.
How the calculator works
- Free cash flow per share grows at your first rate for five years, then at your second rate for five more.
- Each year's cash is discounted back to today: cash ÷ (1 + discount rate)^year.
- After year 10 the company is valued as if it grows forever at the long-run rate (the Gordon growth formula): terminal value = year 10 cash × (1 + long-run growth) ÷ (discount rate − long-run growth), also discounted back.
- Fair value = the discounted cash of years 1 to 10 + the discounted terminal value.
- Buy price = fair value × (1 − margin of safety).
Worked example
A company with $5.00 of free cash flow per share, growing 10% a year for five years and 6% for five more, then 2.5% forever, with a 9% discount rate, is worth about $122 a share with these inputs. About 60% of that value comes from the years after year 10, which is why small changes to the discount rate or long-run growth move the answer a lot.
The reverse DCF
If you enter today's price, the calculator also solves for the one growth rate (held for 10 years) that would make the DCF equal the price. This is often more useful than the fair value itself: it tells you what the market already expects, and you judge whether the company can deliver it.
Where a DCF goes wrong
- It needs positive, fairly steady free cash flow. Young or cyclical companies break it.
- Terminal value usually is most of the answer, so the long-run inputs matter more than the next five years.
- Banks and insurers are valued on book value and returns on equity instead.
On Cluenex: Cluenex runs a bear, base and bull DCF for about 1,000 US stocks every night and shows the buy price on each stock page.
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Questions people ask
What discount rate should I use in a DCF?
Most investors use 8% to 10% for large, stable US companies and more for smaller or riskier ones. The discount rate is the yearly return you require; a higher rate gives a lower fair value.
What is a good terminal growth rate?
Between 2% and 3%. A company cannot grow faster than the whole economy forever, so a terminal rate above long-run GDP growth inflates the value.
Why does the terminal value make up most of the DCF?
Because it covers every year after year 10. With normal inputs it is often 60% to 80% of the total, which is why DCF answers are sensitive to the long-run assumptions.
Should I use free cash flow or earnings in a DCF?
Free cash flow: operating cash flow minus capital spending. It is the cash a company can actually return to shareholders. Earnings include non-cash items.
Education, not investment advice. A calculator is only as good as its inputs.