How to Use DCF (Discounted Cash Flow Model) for Valuation

The Discounted Cash Flow Model

By Matthew Frankel, CFP – Updated Jun 14, 2025 at 11:39 PM

Key Points

DCF model estimates stock value by discounting expected future cash flows to present value.
Using multiple valuation methods with DCF can enhance accuracy in stock evaluations.
DCF's effectiveness is limited by its reliance on assumptions about future growth rates.

The discounted cash flow model is used to value companies in the present based on expectations of future cash flows. As the model's name implies, the expected cash flows are discounted back to their values today. The discounted cash flow model -- often abbreviated as the DCF model -- certainly is not a perfect valuation tool, but it does help to give an idea of what a company is worth.

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Valuation

The process of determining the financial worth of an asset, property, or business based on various factors and market conditions.

In this article, we'll take a look at the discounted cash flow model and how it can be applied to stock valuation, plus an example of how cash flows are discounted to calculate a stock's worth and some of the other valuation methods investors can use to determine the theoretical values of stocks.

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Woman looking at a stock chart on a monitor. — Image source: Getty Images.

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That large symbol at the front of the formula is the Greek letter sigma, and it is used to denote the sum of several quantities. In other words, this symbol tells you to perform a present value calculation for each year's cash flow and then add them all together. Here's what the formula looks like in long form:

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DCF formula expanded — Image source: Author.

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Apple DCF example formula. — Image source: Author.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.