Summary of Putting Discounted Cash Flow into Action

The Bottom Line

As you may tell, this is merely a simple example of how to use a DCF model, but it's still not exactly "simple." Not many people put this much work into their investments. But if you're willing to go through the effort of creating a DCF model for a company you are interested in, you will be much more informed and confident than the vast majority of other investors.

There are numerous small twists that the other type of DCF model (cash flow to the firm) uses, but the output should be approximately the same no matter which DCF method you use for a given firm. Also keep in mind that a model does not need to be super-complex to get you most of the way there and help you clarify your thinking. Remember, using a similar DCF model can take you a long way in finding superior companies trading at a discount to their intrinsic value—the key to a profitable long-term investing strategy.