Fundamental Analysis For Dummies, 2nd Edition

Chapter 11

Finding a Right Price for a Stock Using Discounted Cash Flow

IN THIS CHAPTER

Delving into what a discounted cash-flow analysis is and what it can tell you about a stock price

Finding out how to measure a company’s expected future cash flow

Digging into how to use the results of a discounted cash-flow analysis to size up a stock

Comparing doing a discounted cash-flow analysis by hand with online tools that do it for you

Is this stock cheap?” Those might be the four most commonly uttered words by the typical investor who is serious about fundamental analysis. Perhaps you even picked up this book hoping to find out ways to answer that burning question and find some screaming buys on stocks.

Fundamental analysis can help a great deal when putting a price tag on a stock. By evaluating everything from profitability and debt load to cash flow, you can get a pretty good window into a company’s prospects and form an educated opinion on its future. Looking into a company’s valuation using common ratios like the price-to-earnings ratio, can help you figure out how much investors are paying for a stock.

But while all these tricks of fundamental analysis can help you find stocks to buy or even sell, one of the favorite tools of all might be the discounted cash flow analysis, or DCF. The DCF is sort of the granddaddy when it comes to fundamental analysis – it’s even used by Warren Buffett. The DCF analysis brings an almost scientific approach to putting a price tag on a company. If ...