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A step-by-step walkthrough of building a discounted cash flow model from first-party SEC data.
A discounted cash flow (DCF) model estimates what a business is worth today by projecting the cash it will generate in the future and discounting those cash flows back to the present. The logic is simple: a dollar earned ten years from now is worth less than a dollar today, and a riskier dollar is worth less than a safe one.
Step one is the starting cash flow. Most DCFs begin from free cash flow, which is operating cash flow minus capital expenditures, both of which come straight from the cash-flow statement in a 10-K or 10-Q. This is the cash the business actually throws off after paying to keep its assets running.
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