Discounted cash flow, or DCF, is a method of valuing a company by projecting its future cash flows and converting them into today's dollars. The method assumes that a dollar received in the future is worth less than a dollar received today. By discounting future cash flows, analysts can estimate what a company should theoretically be worth now.
An analyst projects a company will generate $100 million in free cash flow next year and $110 million the year after. Using a discount rate of 10%, she calculates that next year's $100 million is worth about $91 million in today's money, and the following year's $110 million is worth about $91 million today. Summing these and other years' projections gives an estimate of the company's intrinsic value.
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