Why Investors Should Use A DCF Calculator? KEY TAKEAWAYS
You can use a DCF calculator to estimate the value of your investment. Intrinsic Value can help you estimate if the share price is undervalued or overvalued. With the DCF calculator, digging into the future predictions of the investment becomes easier. It does not matter if you are an institutional or a retail investor. You must be aware of the fact that due diligence is paramount prior to investing money
However, what if we tell you that we can help you transform this lethargic analysis with a bit of a more relaxed solution? In this tiring due diligence process, you can seek help from an online DCF calculator for quick estimations. We bet you are keenly interested in how it can help and why you should go for it.
So, let’s dive right into the details…
What is the DCF Calculator? The DCF (Discounted Cash Flow) calculator is an effective tool to calculate the valuation of your investments based on expected future cash flows. Discounted Cash Flow works on the principle that believes the money you have today, holds more value than the same amount of money you will have tomorrow. All this because you can invest your money.
Following this principle, the DCF calculator projects a firm’s expected cash flow through its advanced algorithm. With calculated cash flow, the DCF calculator discounts the present using a risk-adjusted rate, reflecting the investment’s potential risks and returns.
In easy words, as an investor, you can use a DCF calculator to estimate the value of your investment and:
Evaluate the gains from your investments Compare if the stock’s value is worth investing Undervalue and overvalue stock identification Let us try to explain things better with a case study.
DCF Calculator Example In this situation, let us assume that you are pretty impressed with the risk and return opportunity that a Nike share offers. You have now made up your mind and started to research about this company.
At this stage, you can use a DCF calculator this way:
When you search for a particular equity on this calculator, the program lays several options in front of you:
Stock Summary DCF Valuation Relative Valuation Wall St. Estimates Profitability, and many more. Now, with these many metrics, there are some noteworthy points about the stock that are the most basic and first thing to look at:
Current Earning: The calculator shows you how much you can milk profits out of a share if you invest at a particular given time. These earnings might also be showcased as EPS (Earnings per share).Discount Rate: Discounted rate refers to the risk of investment that you are going to bear in a particular stock. Each company stock has its discount rate. You can try different rates at once to evaluate a favorable outcome.Growth Rates: Each program comes with a chart representing expected growth in the upcoming future. You can set different timelines (1Y, 3Y, 5Y, 10Y, 25Y, and so on).Apart from these basic factors, Intrinsic Value is another indicator that can help you in estimating whether the share price is undervalued or overvalued.
Here, as you can see in this case, the intrinsic value of NVDA share is overvalued by 37% . Let us take 2 hypothetical scenarios to learn about overvalued or undervalued equity:
If the intrinsic value is much lower than the actual market price of the stock, it means that the share is overvalued and holds more value in the market than it is currently shown. Whereas, if the intrinsic value is higher than the actual market price, it means that the share is undervalued and holds much more potential to grow in the future. Advantages of Using DCF Calculator Now, we are pretty sure that you have understood how the DCF calculator assists you in comprehending equity. Cutting straight to the point, here are some benefits that you can enjoy as an investor while using this program:
A DCF calculator can be used to analyze almost all the stocks, projects, investments, or shares present in the market . One major rule is that the future cash flows must be forecasted to estimate growth. Predicting the future of the investment becomes easier. And you can also take numerous factors into consideration such as intrinsic value , so that you can keep track of potential assumptions and attributes.You can also play with numbers and percentages to tweak the scenario the way you want. For instance, in the picture below, you can see that the calculator allows you to manipulate numbers the way you want. This way you can plan your investment for each case.Get access to summarized DCF value , and switch between worst, base, and best case .TL;DR — Power of DCF Calculators As an investor, nothing can be more helpful for you than a DCF calculator. This single program is capable of simplifying your work to a significant percentage. If you have learned how to analyze and judge a share by its performance, you can combine your knowledge with such tools to streamline your due diligence process.
Speaking of its benefits, you can enjoy several features like analyzing almost all the stocks or shares with ease, digging into past and future predictions, and tweak investment scenarios as per your assumptions.
