Documentation

    What is a DCF?
    Where does your data come from?
    How can I trust your DCF model?
    Base Year, Years 1-10 & Terminal Year
    Revenue
    Operating Margin
    Tax Rate
    NOPAT
    Reinvestment
    FCFF
    NOL
    Cost of Capital
    Cumulated Discount Factor
    PV (FCFF)
    Terminal Cash Flow
    Terminal Cost of Capital
    Terminal Value
    PV (Terminal Value)
    PV (CF Over Next 10 Years)
    Sum of PV
    Probability of Failure
    Proceeds if the Firm Fails
    Operating Assets
    Equity
    Options
    Common Stock Equity
    Estimated Value Per Share
    Margin of Safety
What is a DCF?
A Discounted Cash Flow (DCF) is a tool that helps investors find the intrinsic value of a cash flow producing asset. In simple terms it's there to help you find if a stocks current price is undervalued based on the real value of the stock.
Where does your data come from?
We use the eodhistoricaldata api.
How can I trust your DCF model?
We base our model off of excel DCF templates by Aswath Damodaran. Aswath is a world renowned financial professor at NYU and is widely acknowledged as one of the best in the industry. You can see for your self by following along to his valuation courses on youtube or visting his site for all of the financial models.
Base Year, Years 1-10 & Terminal Year

The base year stands for the current year you are in, specifically the Trailing Twelve Months (TTM). The reason why we use the TTM and not the annual financial results is because it's the most up to date financial information for the company.

1, 2, 3... 10 stands for the subsequent yearly data. For example if you are valuing a company on the 21st November 2020 and the most recent TTM data was last released on the 20th October 2020 then next year (base year) will be from 21st November 2020 to 21st November 2021 and the same for the next years after that. So the years represent the subsequent years after the most recent financial results were released and not when you are doing the DCF.

The terminal year is all of the years after year 10 up to infinity. It's not possible to model that far out into the future and even 10 years is hard so we just assign a terminal year to solve this as best we can. The reason why it works doing it forever is because the discount rate eventually makes the terminal value worthless after so many years.

Revenue

The revenue growth rate is one of the main value drivers that really affects the estimated value per share. So it is really important that you choose a realistic growth rate for your DCF. We provide a CAGR input for you in the cell: 'Required Inputs'!$B1.

Compound Annual Growth Rate (CAGR) is the average growth rate that you think will happen for the company from year 1-5 revenues. We then use this as the revenue growth for years 1-5. To figure out what to put in this input you need to check the companies previous revenue growth rates, the industry average compared to year 10 revenue growth and also your thoughts on the future of the company.

From years 6-10 revenues we slightly reduce the growth rate each year. This is to safe guard you against putting in an unreasonably large revenue growth rate. It's also more realistic in most cases due to companies growth slowing as their revenue becomes bigger and the company matures. The terminal growth year is then set to be equal to year 10's growth rate.

Operating Margin

Operating Target Margin is the other main value driving input that heavily affects your DCF. We provide an input for you in the cell: 'Required Inputs'!$B2.

We use the operating margin input in Years 1-10 and set the terminal year to be equal to year 10. To figure out what to put in this input you need to check the companies current Operating margin, the industries average Operating margin and also your thoughts on what type of margin the company can achieve by year 10. This will differ greatly depending on how much of a moat your company has. For example, a company like Boeing is in a duopoly with Airbus so it should be able to hold it's current margins for a very long time.

The Year of Convergence input also affects the Operating Margin calculations. We provide an input for you in the cell: 'Required Inputs'!$B3.

The Operating Margin will slowly converge from the base years margin to your Operating margin in year 10. The speed at which this happens depends on the Year of Convergence that you type in to this input.

Tax Rate
The tax rate in the base year is set to be the effective tax rate for your company. This tax rate then converges to the marginal tax rate after year 5. The reason we converge from the effective tax rate to the marginal is because a company cannot defer it's taxes forever, eventually the company has to pay the countries marginal corporation tax rate.
NOPAT
This is essentially the Earnings Before Interest. The difference between this and the NOPAT is that taxes are included in this calculation.
Reinvestment
The sales to capital ratio one is that input that is used in these cells and located in 'Required Inputs'!$B4. This is how much the company is reinvesting into the company to grow. Companies cannot grow their revenue or margins without reinvesting profits back into the business. We calculate the difference between the revenues from this year to the previous year and divide it by the sales to capital ratio. This gives us the reinvestment amount for the current year.
FCFF
Free Cash Flow to the Firm (FCFF) is the amount of money the company has left over that can be used for anything from dividends to reinvesting back into the firm.
NOL
The inputs for this are the sections in 'Optional Inputs'!$J2. Net Operating Loss (NOL). Any losses from the previous years that the company is carrying over to this year. The reason this is important in a DCF is because it reduces the taxable income so the company has to pay less tax.
Cost of Capital

The inputs for this are the sections in 'Optional Inputs'!$A1:$E1 which are Pre-tax Cost of Debt, Book Value of Convertible Debt and Number of Preferred Shares. Weighted Cost of Capital (WACC) has multiple elements that go in to calculating it. There are also different techniques to working out the WACC. We use Aswath Damodaran's bottom-up beta instead of the CAPM model. We believe this is a much better representation of risk. The elements that go into a companies WACC are:

  • Risk Free Rate - The return you could get in the same currency with 0 risk. We use the last closing daily yield for the gb in the same currency that the valuation is being done in. The ads is the default chance in % for the country where the government bond is being used. The reason for this is that a lot of countries do not have Aaa ratings so they have default risk and therefore are not risk free so we have to adjust for that.
    Formula: rfr = gb - ads
      where
    • rfr = Risk Free Rate
    • gb = Government Bonds 10 Year Yield
    • ads = Adjusted Default Spread
  • Equity Risk Premium - The additional return demanded by investors for investing in that country. We set the mmerp to be the US because it is an establish mature market. The crp is going to be the spread between the country your company is in vs the mmerp. For example, if the mmerp is 5.23% then the US has an erp of 5.23% as it has no crp because it's credit rating is Aaa. The UK has a credit rating of AA2 which is lower than the US, it therefore has a crp of 0.73%. So the UK's erp is 5.96%. Investors demand more return for investing in the UK because the default chance is higher.
    Formula: erp = mmerp + crp
      where
    • erp = Equity Risk Premium
    • mmerp = Mature Market Equity Risk Premium
    • crp = Country Risk Premium
  • Estimated Pre-tax Cost of Debt - Each company has a cost of raising debt. The more debt a company raises the higher the chance of default but the tax benefits of offsetting interest payments also increases.
    Formula: pt = rfr + is + ads
      where
    • pt = Estimated Pretax Cost of Debt
    • rfr = Risk Free Rate
    • is = Interest Spread
    • ads = Adjusted Default Spread
  • Estimated Market Value of Normal Debt - The market value of Normal debt.
    Formula: cd = ie * (1 - (1 + pt) ** - m)) / pt + bd / (1 + pt) ** m
      where
    • cd = Estimated Market Value of Normal Debt in Convertible
    • ie = Interest Expense
    • pt = Pre-tax Cost of Debt
    • m = Average Maturity of Debt
    • bd = Book Value of Debt
  • Estimated Market Value of Normal Debt in Convertible - The market value of Normal debt in convertible.
    Formula: cd = iecd * (1 - (1 + pt) ** - mcd)) / pt + bcd / (1 + pt) ** mcd
      where
    • cd = Estimated Market Value of Normal Debt in Convertible
    • iecd = Interest Expense on Convertible Debt
    • pt = Pre-tax Cost of Debt
    • mcd = Maturity of Convertible Debt
    • bcd = Book Value of Convertible Debt
  • Debt Market Value - The market value of debt.
    Formula: d = sd + cd
      where
    • d = Debt Market Value
    • sd = Estimated Market Value of Normal Debt
    • cd = Estimated Market Value of Normal Debt in Convertible
  • Equity Market Value - The market value of equity. We use the market value and not book value because it's the theoretical price you would have to pay to acquire the company.
    Formula: em = p * so
      where
    • em = Equity Market Value
    • p = Current Stock Price
    • so = Shares Outstanding
  • Preferred Stock Market Value - The market value of Preferred Stock outstanding.
    Formula: ps = n * mp
      where
    • ps = Preferred Stock Market Value
    • n = Number of Preferred Shares Outstanding
    • mp = Market Price Per Share
  • Total Market Value - The sum of Total Market Value.
    Formula: tm = em + d + ps
      where
    • tm = Total Market Value
    • em = Total Equity Market Value
    • d = Total Debt Market Value
    • ps = Total Preferred Stock Market Value
  • Unlevered Beta - The risk a company has in it's industry relative to other companies. We use a bottom-up beta for this. Currently we only use a single industry that we get from our API for the company. We will support multiple industries for this field in the future. For 95% of companies a single industry is fine. We lookup the average unlevered beta for your companies industry and set this field equal to it.
    Formula: ub = iub
      where
    • ub = Unlevered Beta
    • iub = Industry Average Unlevered Beta
  • Levered Beta - The risk a company has in it's industry relative to other companies including how leveraged it is, i.e debt. Leverage varies across industries, for example the air transport industry has to take on a lot of debt to purchase or lease expensive airplanes, whereas a software company might only have to take on a small amount of debt. We need to take this into account when determining risk as the more debt a company has, the more likely it is to default on that debt.
    Formula: lb = ub * (1 + (1 - t) * (d / e))
      where
    • lb = Levered Beta
    • ub = Unlevered Beta
    • t = Marginal Tax Rate
    • d = Debt Market Value
    • e = Equity Market Value
  • Cost of Preferred Stock 
    Formula: cps = anp / mp
      where
    • cps = Cost of Preferred Stock
    • anp = Annual Dividend PerShare
    • mp = Market Price Per Share
  • Equity Weight - Weighted % of equity.
    Formula: we = em / tm
      where
    • we = Weighted % of equity
    • em = Equity Market Value
    • tm = Total Market Value
  • Debt Weight - Weighted % of debt.
    Formula: wd = d / tm
      where
    • wd = Weighted % of Debt
    • d = Debt Market Value
    • tm = Total Market Value
  • Preferred Stock Weight - Weighted % of preferred stock.
    Formula: wps = ps / tm
      where
    • wps = Weighted % of Preferred Stock
    • ps = Preferred Stock Market Value
    • tm = Total Market Value
  • Total Weight - Total weight in cost of capital.
    Formula: twc = we + wd + wps
      where
    • twc = Total Weight Cost of Capital
    • we = Weighted % of equity
    • wd = Weighted % of Debt
    • wps = Weighted % of Preferred Stock
  • Equity Cost of Capital 
    Formula: ecc = rfr + lb + erp
      where
    • ecc = Equity Cost of Capital
    • rfr = Risk Free Rate
    • lb = Levered Beta
    • erp = Equity Risk Premium
  • Debt Cost of Capital 
    Formula: dcc = pt * t
      where
    • dcc = Debt Cost of Capital
    • pt = Estimated Pretax Cost of Debt
    • t = Marginal Tax Rate
  • Preferred Stock Cost of Capital 
    Formula: ps = cps
      where
    • ps = Preferred Stock Cost of Capital
    • cps = Cost of Preferred Stock
  • Cost of Capital (WACC) - The total cost of raising capital for the company weighted by the type of capital it raises, i.e equity, debt or preferred stock. For example, if a company raises 80% of it's capital in equity then the weight for equity will be set to 80% as equity would have more of an affect on the cost of the capital.
    Formula: wacc = we * e + wd * d + wps * ps
      where
    • wacc = Weighted Average Cost of Capital
    • we = Weighted % of equity
    • e = Equity Cost of Capital
    • wd = Weighted % of Debt
    • d = Debt Cost of Capital
    • wps = Weighted % of Preferred Stock
    • ps = Preferred Stock Cost of Capital
Cumulated Discount Factor
This is the opposite of the Cost of Capital in decimal form. We take the previous years Discount Factor into account as well.
PV (FCFF)
Present Value of Free Cash Flow to the Firm (PV (FCFF)) is the FCFF modified by the Discount Factor. The reason why we do this is because the cash earned by a company today is worth more than cash earned in the future. This is due to the time value of money and the risks surrounding a company (which is captured in the Cost of Capital).
Terminal Cash Flow
The cash flows that the company generates each year after year 10.
Terminal Cost of Capital
The cost of capital for the company each year after year 10.
Terminal Value
The total value of the cash flows after year 10.
PV (Terminal Value)
The total value of the cash flows after year 10 discounted to today's value. This is the true value of the Terminal Cash flows.
PV (CF Over Next 10 Years)
The total value of the cash flows in the next 10 years discounted to today's value.
Sum of PV
The total sum of the present values of the previous two fields.
Probability of Failure
The input for this is in 'Optional Inputs'!$J4. Many young, growth companies fail, especially if they have trouble raising cash. Many distressed companies fail because they have trouble making debt payments. This is a tough input to estimate but try to use the agencies credit rating if the company has one, if not then use the synthetic credit rating default spread as a guide.
Proceeds if the Firm Fails
The input for this is in 'Optional Inputs'!$J5. If the company fails then sometimes there will be assets that get sold off (usually at fire sale prices) or cash left over to distribute to shareholders. This is only true if all liabilities have been paid first as shareholders are last in line if a company goes bankrupt. Sometimes however, companies will continue to run themselves into the ground with more debt to continue giving the executives a job and therefore will never have proceeds to distribute to shareholders.
Operating Assets
We take the Sum of the Present Value and modify it. We minus debt and minority interests due to it not being distributable to shareholders. Cash and Non-Operating Assets are added back as these are distributable to shareholders but were not part of the DCF.
Equity
This is the sum of the above calculations after Operating Assets has been modified.
Options
The inputs for this are in 'Optional Inputs'!$H2:$H4 which are Employee Options Outstanding, Average Strike Price and Average Maturity. We minus Employee Options from Equity due to the company having to pay cash to these employees when they exercise them. Thus there is less cash attributable to shareholders.
Common Stock Equity
This is Equity with the employee options taken away. This is the final result of equity which is distributable to shareholders over the companies life according to your DCF.
Estimated Value Per Share
The intrinsic value per share that the share price should be trading at according to your DCF. This may be accurate or not, it all depends on how accurate your inputs are.
Margin of Safety
How undervalued or overvalued the current price of the stock, if it is undervalued then the stock is said to have a margin of safety.