DCF (Discounted Cash Flow) is a valuation method that estimates the intrinsic value of a business by forecasting its future free cash flows and discounting them to today's value, using a discount rate that reflects the riskiness of those cash flows (typically the WACC — Weighted Average Cost of Capital).
Intrinsic Value = Σ (Future Cash Flow ÷ (1 + Discount Rate)^Year) + Terminal Value
The key inputs
- 1Revenue and margin forecasts — how much cash will the business generate each year?
- 2Discount rate — higher for riskier, earlier-stage companies
- 3Terminal value — the value of all cash flows beyond the forecast period (often the largest input and the most sensitive)
DCF for unlisted companies
DCF is theoretically sound but practically difficult for unlisted companies, because:
- Financial projections are unavailable or unreliable
- The discount rate is hard to calibrate without market prices
- Terminal value assumptions dominate the output
That said, a rough DCF helps frame whether the current unlisted price implies reasonable or heroic assumptions. If a company needs to sustain 35% revenue growth for 10 years to justify its price, that's a meaningful insight.
Example: A DCF of an unlisted SaaS company at a 25% discount rate suggested a ₹400/share value — broadly in line with the unlisted market price of ₹380.