What Is DCF Analysis Explained?
Discounted cash flow (DCF) analysis calculates intrinsic value by projecting future free cash flows and discounting them to present value. The core formula is: Intrinsic Value = Σ (FCF_t / (1+r)^t) + Terminal Value, where r is the discount rate and t is the time period.
Why It Matters
The most common DCF mistake is using overly optimistic growth assumptions. Research shows that analyst growth projections are systematically too high by 5-10 percentage points. Using historical growth rates or industry averages as anchors produces more reliable valuations.
How LyraIQ Approaches This
LyraIQ's DCF tool automates the calculation while providing conservative default assumptions based on historical data. The system generates 3 scenarios (bear, base, bull) with probability-weighted outcomes, and highlights which assumptions drive the most valuation sensitivity.
Practical Steps
- Estimate 5-year revenue growth using historical CAGR or industry median
- Project operating margins based on company history and competitive position
- Calculate free cash flow by subtracting capex from operating cash flow
- Set discount rate at WACC or 8-12% for simplicity
- Compute terminal value using perpetuity growth formula with 2-3% long-term growth