Discounted cash flow

Discounted cash flow (DCF) is the present value of a company's future cash flows. DCF is calculated by dividing projected annual earnings over an extended period by an appropriate discount rate, which is the weighted cost of raising capital by issuing debt or equity.

The discount rate is lower for stable, well-established companies than for those considered at potential risk.

Some analysts use only projected dividend income in calculating future cash flow. Others include projected earnings that would be available for stock buybacks.