Free cash flowĬash flow (CF) is the net amount of cash and cash equivalents (like short-term government bonds and treasury bills) being transferred in and out of an organization, where inflow indicates cash being received while outflow means money being spent.įree cash flow (FCF) is cash flow that is generated from operations, free from any encumbrances. Some of these other methods include trading multiples, which would fall under the category of comparable analysis, as well as leveraged buyout (LBO) analysis. This model uses estimates to calculate future values and, as a result, could be unreliable if the estimates are inaccurate (garbage in = garbage out) which is it is recommended to use various valuation methods to value an asset.
The DCF method of valuation is based on the belief that the value of a business equals the total discounted cash flows it generates. It requires estimating the total value of all future cash flows (both inflows and outflows) and then discounting them (usually using Weighted Average Cost of Capital – WACC) to find the net present value (NPV). The discounted cash flow (DCF) model is one of the most important and widely used financial modeling methods to value a company.
