Hey this is tom, and in this video i'll teach you how to do a complete dcf discounted cash flow evaluation model from scratch. You need no prior experience, no understanding in any sort of finance. Nothing! Just listen to me and of course it sounds like a pitch of a course, but i'm not selling anything. So don't click, nothing, don't buy nothing.

You know don't subscribe to. Nothing. Just give me your attention. There's no courses.

This is pretty much the course. It is what it is and, honestly this isn't rocket science. I've been very vocal about this. You know people want you to think that this is complicated.

It's not it's very, very simple, as you're about to see in the minute anybody can do it and if you just stay for the next few minutes, you'll be able to do it yourself and if it means you come for less of my videos, because you can Do it on your own? That's fine! At some point! If you love somebody, you got ta. Let them go right. So it's fine, i'm not trying to build a junkie dealer relationship. I want to teach you guys how to fish.

The idea isn't just to give away fish is actually to teach you some skills now with that out of the way, let's get started so when you're running a dcf, you need to understand. What's going on now, the first thing you need to understand what a dcf is and what the target price you'll get in the dcf actually means. Sometimes people ask me well tom. The target price you said here is fifteen hundred dollars right.

When is it going to be fifteen hundred dollars? The thing is, that's the whole point of the dcf. It's now it's today, whatever value we're getting here, this is the valuation of the company today, based on future cash flow. So the idea here is to estimate based on information. We have currently available.

What are the actual expenditures and cash flows of this company for the next five to ten years depends on which type of dcf you're running we're going to run the 5dcf and try to evaluate if you bring back the real value of the money today from two Three four five years back to today: what's the value of this cash flow today because think about it! This way, if i owe you a million dollars - and i got ta - give it to you in five years, if i pay you today, you take less money for multiple reasons: right, less risk, faster cash plus, you can put it in the bank, get some interest. There's a lot of reasons why money today right is not the same as money in five years, so we're taking all these estimates of cash flows, expenditures bringing them back to today, i'm going to show you exactly how to do it and by the way, this template, As well as every single dcf that i do on, my channel is available to download for my patreon group. The link to join us below is five bucks per month. I mean you can support the channel just by doing that, but it's okay, i'm gon na show it all for free here and now, let's just get started with the model, it's that simple.

So on the screen right now we have a company with the dcf already finished. It doesn't really matter which company don't try to figure out which company it is. It doesn't matter so. The first line you see right here says ebitda now, ebay.

That sounds complicated as if it's some sort of a space thing you know complicated finance. You know blah blah blah blah blah. It's very simple: it's just earnings before interest depreciation amortization, that's it! You take out the depreciation. Whatever you lose in value of the stuff, you own the same thing for amortization.

It just applies for intangibles and interest. That's it that's ebitda, very, very simple to calculate and in fact, in every financial return of any public company that has a specific line. When you can go and look at it, it's very very simple to understand. Okay, so now you've figured out the ebitda and you can see it right here across the board.

Now you got to take out the depreciation and amortization, because these are tax benefits. Essentially, when you take them out that reduces the tax liability of a company, let me show you so, as you can see right now on the screen, the depreciation amortization dramatically reduced the amount of earnings that i have to pay tax on now below right here you Can see the tax rate that i use right here, it's 21, but it can be any percentage you want to use depending on the country, depending on the effective tax rate. I usually use nominal tax rates, even though they're higher than the effective tax rate the company actually pays with all the loopholes and deductions just to be careful. Now, then you apply the tax right here.

You have the tax and you get the after tax number. Let me show you now comes the tricky part you got ta take out from this number. A few amounts. The first amount that takes out is capex capital expenditures.

Capital expenditures is things that you actually expend in your business. You basically spend these, but they're, not expenses. The current expenses, like salaries, that are basically things that you're investing in the business buying new machinery right building a new factory stuff that are heavy expenses designed to generate income in the future, basically become capex capex, because capital expenditures - and so you take the capex, the Capital expenditure and you deduct it from the after tax amount. Then you have the nwc now nwc sounds complicated, but it's very, very simple: it just means net working capital.

You deduct that from the after tax amount, minus the capital. So what the hell is? The net working capital - let me give you a simple example: let's say that you operate a business where you buy inventory and then you sell it right. So let's say that you're buying inventory on immediate cash. You got to pay for every single piece of inventory that you actually put in your warehouse and let's say that the payment terms of your customers that pay you the money - is like 45 days or 90 days.

That means that your net working capital is actually high, but let's say that you have the other way around. Let's say that you have the same business but you're paying to your suppliers plus 90 days plus 120 days. So, basically, you have a big line of credit, but your customers are paying immediately upon delivery. That means your networking capital is lower.

So essentially, these fancy words net working capital just mean how much cash you need on an active basis to operate your business and even though it sounds complicated. That's all it is it's just how much cash you need to operate your business, how much cash intensive business do you have and that thing actually doesn't even represent that that represents the changes in networking capital, basically how much it changes from a year to a year And that change actually can reduce the free cash flow, which is what we're looking for. So how the hell do you calculate networking capital changes so, first of all, you can actually go to seeking alpha, not affiliated, no affiliate link and you can find it right there for every single company they have on their website. But if you want to do the legwork yourself, it's quite simple, all you got to do is basically take accounts.

Receivable. On the one hand, that's the minus side and on the other hand, you have inventory and prepaid basically stuff you paid for the inventory that actually gives you a number and that number from year to year. The changes in that number actually give you the net working capital now, if you want to even go simpler than that, just take current assets, minus current liabilities and measure the changes year over year. It's that simple, it's not complicated! Now next we have the free cash flow.

The holy grail check it out, but here comes the problem right. This is current, but this is next year. This is in two years. This is three years.

This is four years, so these are future cash flows. How much do they worth today and for that? We use a discount rate check this out. So right now, as you can see on the screen, i'm using a 10 discount rate, which is extremely conservative. Now the higher the interest rate is the higher.

The discount rate is because, as simple as it is putting money in the bank and getting interest, this is pretty much discount rate. Now i'm oversimplifying it and, of course, there's a good way to actually calculate the weighted average cost of capital, or not i'm going to do this here. It's very very simple: you can use a 10 as a benchmark and you'll be way over than where you have to be, especially in a low interest. Environment like we have today.

10 is extremely conservative. Some go for 8, some go for 12.. You can keep it at 10 and you'll be fine, at least for the next few years. As long as the interest rates are that low, because the higher you go, if you want to be even more conservative, you can go 12, you can go 14, but your valuation is going to plummet.

However, if you lower your discount rate, the valuation is going to go crazy. That's actually very relevant to why interest rates matter for variation of companies and why the stock market is so sensitive to interest rates, but that's a whole different video. So, let's bring all of these amounts back to today, so right now on this screen, as you can see, the present value sum is 15.7 billion. We summed all these amounts and we got 15.7 billion.

That means we applied a 10 interest rate discount rate. Whatever you want to call it and we use the amount of years as a multiplier, basically how many times we actually brought it back. So, as you can see right here, the number that actually decreased the most is the five year number and that's how it works. So this is the present value sum, but that's not enough, because the company is not going out of business right.

It's not going out of business, hopefully in five years, so we got to use a perpetual growth rate to represent the future growth of the company, which has to be in the realm of inflation, nothing more. It has to be very conservative, and this is why i'm using a four percent so right now you can see the four percent, which is the rate we're using right. The 2026 free cash flow 8.9 billion the terminal value in 2026 and we're bringing it back to present values which gives us 92 billion. 0.8.

You add the 15 billion, which you have right here. The present value sum to this amount and you get the dcf value. 113 billion point two: this is the dcf value of this company, but this is not the end yet now the next thing i usually do, which a lot of people don't is, i actually add in a completely unrelated calculation, which is the dcf multiplier. What i use here right here is, i take the ebitda of the year five and i multiply it by a number.

That's industry specific now here, i'm using 18 for tech companies, it's 25. It can differ, and basically i get this number right here, and this number gives me a comparable of what the multiplier system will give me based on this valuation. So right here, the multiple is giving me 146.. The dcf value is giving me 113 and there's one more stage we got to do here, i'm not going to show it on the screen, but basically, what you do is you add in the net debt you take out the amount of cash the company.

Has you reduce it by the amount of debt the company has and that should increase the dcf as well as well as the multiple, obviously, because it's cash and its assets you got ta include and what you do next, if you want to simplify it, is you Take the amount of outstanding shares. You divide these numbers by the amount of outstanding shares and you get the present value of the company today, based on your dcf, and this is your target price, and this is as simple as it gets. There's nothing complicated about it. You can build this spreadsheet on your own quite easily.

You don't need me, but if you're lazy - and you want to use my template - it's actually available to download for channel members and patreons five bucks per month, you can join, but this is really not needed. You can do it for yourself in like 10 minutes, it's not complicated. I hope this was helpful. I know this video is not going to get a ton of views, but it's fine.

As long as some of you learned the skill set, i'm happy with it. Let me know below if something wasn't clear: if you need more of these videos and i'll try to do as much of it as i can see you tomorrow.