How Much Is That Stock Really Worth? A Practical Guide to DCF Valuation

I like investing in stocks where valuation is not exaggerated. Not hyped, not inflated, and definitely not driven by social media trends. I like to know what a business is worth — really worth — based on what it can generate in cash over time. That’s where Discounted Cash Flow (DCF) valuation comes in.

And that’s also why I built a simple, free DCF calculator for NSE-listed stocks: Try it here.

What Is Valuation, Really?

Valuation is the process of estimating what a business is worth.

There are many methods:

• Comparable Companies (Comps) – Compare a company’s valuation multiples (like P/E, EV/EBITDA) with similar companies.

• Precedent Transactions – What have similar companies sold for recently?

• Asset-Based Valuation – Value the net assets on the balance sheet.

• Dividend Discount Model (DDM) – For dividend-paying stocks.

• Price-to-Earnings (P/E) Ratio – A widely used metric calculated as Price ÷ Earnings. It gives a quick sense of how much investors are willing to pay for ₹1 of earnings. While it's easy to use, it doesn’t account for future growth or free cash flows.

• Discounted Cash Flow (DCF) – Project future free cash flows and discount them to today’s value.

Each method has its place. But DCF stands out when you want a fundamental, long-term view based on the business's actual ability to generate cash.

Before We Dive Into DCF — A Quick Note on the Time Value of Money

At the heart of DCF lies a simple but powerful idea:
Money today is worth more than money tomorrow.

This is called the Time Value of Money.

If someone offered you ₹1,000 today or the same ₹1,000 a year later, you’d naturally take it today — and that’s rational. You could invest it, earn interest, or use it in ways that grow its value.

This idea is what powers every financial model, including DCF.

What Are Future Cash Flows?

When we estimate the future cash flows of a business, we’re forecasting how much money it will generate in the coming years — usually in terms of Free Cash Flow to Firm (FCFF) or Free Cash Flow to Equity (FCFE).

These aren't guaranteed — they're educated projections based on the company’s performance, growth plans, and the overall market environment.

But there’s a catch: Even if the business is expected to generate ₹50 crore in Year 1, ₹55 crore in Year 2, and so on — that’s not how much those rupees are worth today.

From Future to Present: Discounting

So how do we find out what those future rupees are worth today?

We use something called discounting — essentially the opposite of compounding.

If compounding tells you what ₹100 will become in the future, discounting brings ₹100 from the future back to today.

Let’s say the discount rate (i.e., your required rate of return) is 12%.
That means ₹112 a year from now is worth ₹100 today.
Or in reverse:
₹112 ÷ (1 + 0.12) = ₹100

Present Value = Future Cash Flow ÷ (1 + discount rate)^year

Add up the present values of all projected years, and you get the intrinsic value of the business today.

A Simple Example

Let’s say you expect a company to generate the following Free Cash Flows:

• Year 1: ₹100 crore

• Year 2: ₹110 crore

• Year 3: ₹120 crore

And you decide on a discount rate of 10%.

Then the present value of these cash flows would be:

• Year 1: ₹100 ÷ (1 + 0.10)^1 = ₹90.91 crore

• Year 2: ₹110 ÷ (1 + 0.10)^2 = ₹90.91 crore

• Year 3: ₹120 ÷ (1 + 0.10)^3 = ₹90.16 crore

Total Present Value = ₹271.98 crore

That’s your estimate of what those future cash flows are worth today.

Of course, in real-world DCF, we go beyond just 3 years. We estimate for 5-10 years, and then use a Terminal Value for the remaining business life and then bring it back to present value using the discounting concept.

What My Calculator Does

My DCF Calculator for NSE Stocks helps you:

• Input or auto-fetch free cash flow data

• Make assumptions on growth rate, discount rate, and terminal value

• See the final intrinsic value

• Compare it to the current market price

It’s designed to help long-term investors take a rational, math-backed view of a stock’s valuation — instead of just following price charts or stock tips.

You can explore the source code on GitHub: github.com/mastermindankur/valuation-stocks

Final Thoughts

DCF is not perfect — it depends on your inputs, and small changes can lead to big valuation swings. But it’s one of the best tools we have to answer the most fundamental question:

"If I owned this business entirely, how much is it worth today based on the cash it will generate tomorrow?"

Use DCF with discipline. Don’t chase hype. And remember: a good business at a fair price is better than a fair business at a good story.

Happy Valuing!