Understanding discounted cash flow (DCF) in private equity

Discounted Cash-Flow (DC F) is a financial method used to assess the value of a company. It is based on an estimate of the future cash flows generated by the company, taking into account inflation and the required return.

In a DCF, the cash flows that will be generated by the company in the future are estimated as a group. This group is then converted into today's value using an appropriate discount rate.

Each cash flow, for each year, is estimated and subjected to an appropriate discount rate process, which is applied to each flow to bring it down to its present value in order to give meaning to its contribution to the company's valuation. In this way, these accumulated flows give the value of the company as assessed by the DCF.

Ultimately, the DCF is a valid method for assessing the value of a company in both the short and long term, since it takes into account future cash flows and their value today, making it more reliable and accurate than other valuation methods such as stock market multiples or comparative methods.