How to Value a Stock Step 4: Discounted Cash Flow (DCF)
This is the fourth article in a four part series that walks readers through how to rate and value a stock. Chemical manufacturer DuPont (DD) is our example. We began by calculating NOPAT, next calculating Invested Capital, and then determining economic earnings. Our fourth and final step to gauge the value of a stock is to use our reverse dynamic discounted cash flow model to quantify market expectations for future cash flows of a company. As Warren Buffet has stated many times, the value of any stock equals the discounted value of the future cash flows available to equity holders. Therefore, changes in the expected cash flows are the most important driver of changes in a stock price. Having made the necessary adjustments to derive accurate and complete NOPAT, Invested Capital, economic earnings and free cash flow (FCF), we have high conviction in our DCF model.