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**Table of Contents** *generated with [DocToc](https://github.com/thlorenz/doctoc)*
- [DCF Valuation Analysis](#dcf-valuation-analysis)
- [Overview](#overview)
- [Features](#features)
- [Usage](#usage)
- [Basic Usage](#basic-usage)
- [Output](#output)
- [File Location](#file-location)
- [Excel Output Example](#excel-output-example)
- [Key Sections Explained](#key-sections-explained)
- [1. Discount Rate Estimates (Top Left)](#1-discount-rate-estimates-top-left)
- [2. Growth Estimates (Middle Left)](#2-growth-estimates-middle-left)
- [3. DCF Template (Center)](#3-dcf-template-center)
- [4. DCF Value (Top Right)](#4-dcf-value-top-right)
- [5. Investment Decision (Right)](#5-investment-decision-right)
- [Customization in Excel](#customization-in-excel)
- [Use Cases](#use-cases)
- [Investment Analysis](#investment-analysis)
- [Portfolio Management](#portfolio-management)
- [Due Diligence](#due-diligence)
- [Sensitivity Analysis](#sensitivity-analysis)
- [Educational Purposes](#educational-purposes)
- [Best Practices](#best-practices)
- [Technical Details](#technical-details)
- [Data Sources](#data-sources)
- [Calculations](#calculations)
- [Currency](#currency)
- [Limitations](#limitations)
- [Related Methods](#related-methods)
- [Example Workflow](#example-workflow)
- [FAQ](#faq)
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# DCF Valuation Analysis
The `dcf()` method generates a comprehensive Discounted Cash Flow (DCF) valuation Excel spreadsheet for detailed stock valuation analysis. This tool automates the complex DCF calculation process and presents results in a professional, easy-to-understand format.
## Overview
The DCF method is one of the most important valuation techniques in finance. It estimates a company's intrinsic value by projecting future free cash flows and discounting them back to present value using the Weighted Average Cost of Capital (WACC).
## Features
The generated Excel workbook includes five main sections:
1. **📊 Discount Rate Estimates**
- Cost of Equity calculation
- Cost of Debt calculation
- WACC (Weighted Average Cost of Capital) calculation
- Beta and risk-free rate metrics
2. **📈 Growth Estimates**
- Historical 3-year CAGR for Revenue
- Historical 3-year CAGR for Free Cash Flow (FCF)
- Historical 3-year CAGR for EBITDA
- Historical 3-year CAGR for Net Income
- Year-over-year growth details for the past 3 years
3. **🧮 DCF Template**
- 10-year cash flow projections
- Discount factors for each year
- Present value calculations
- Terminal value estimation
- Total enterprise value calculation
4. **💰 DCF Value**
- Enterprise Value (EV)
- Cash and cash equivalents
- Total debt
- Equity Value calculation
- Shares outstanding
- Fair price per share
- Current market price
- Margin of safety
5. **✅ Investment Recommendation**
- Buy/Sell recommendation based on fair value vs. current price
- Quick decision support for investors
## Usage
### Basic Usage
```python
from defeatbeta_api import Ticker
# Initialize ticker
ticker = Ticker("QCOM")
# Generate DCF analysis
result = ticker.dcf()
print(result)
```
### Output
```python
>>> ticker.dcf()
{
'file_path': '/path/to/QCOM.xlsx',
'description': 'DCF Valuation Analysis for QCOM'
}
```
The method returns a dictionary containing:
- `file_path`: The absolute path to the generated Excel file
- `description`: A brief description of the analysis
### File Location
- **[In Jupyter Notebook](https://mybinder.org/v2/gh/defeat-beta/defeatbeta-api/main?urlpath=lab/tree/notebooks/06_tutorial_dcf.ipynb)**: The Excel file is saved to your current working directory (e.g., `QCOM.xlsx`)
- **In Python Script**: The Excel file is saved to the DCF directory (e.g., `/tmp/defeatbeta/dcf/QCOM.xlsx`)
In Jupyter notebooks, the method also displays an interactive download button for easy access to the file.
## Excel Output Example
Below is a complete DCF analysis for QCOM (Qualcomm):
### Key Sections Explained
#### 1. Discount Rate Estimates (Top Left)
This section calculates the WACC, which is used to discount future cash flows. It includes:
- **Cost of Equity**: Calculated using the Capital Asset Pricing Model (CAPM)
- **Cost of Debt**: Based on the company's borrowing rate
- **WACC**: Weighted average of equity and debt costs
#### 2. Growth Estimates (Middle Left)
Historical growth rates help project future performance:
- **Revenue CAGR**: Compound annual growth rate of revenue
- **FCF CAGR**: Free cash flow growth rate
- **EBITDA CAGR**: Earnings before interest, taxes, depreciation, and amortization growth
- **Net Income CAGR**: Net profit growth rate
Each metric shows the past 3 years of data with year-over-year growth percentages.
#### 3. DCF Template (Center)
The core DCF calculation with 10-year projections:
- **Year 0 (Base)**: Starting with the most recent TTM Free Cash Flow
- **Years 1-10**: Projected cash flows based on selected growth rate
- **Discount Factor**: Present value factor for each year
- **Present Value**: Discounted cash flow for each year
- **Terminal Value**: Value beyond the 10-year projection period
- **Total PV**: Sum of all present values
#### 4. DCF Value (Top Right)
Final valuation results:
- **Enterprise Value (EV)**: Total value of the operating business
- **+ Cash**: Add cash and cash equivalents
- **- Debt**: Subtract total debt
- **= Equity Value**: Value attributable to shareholders
- **÷ Shares Outstanding**: Number of shares
- **= Fair Price**: Estimated fair value per share
#### 5. Investment Decision (Right)
- **Fair Price**: DCF-calculated fair value
- **Current Price**: Current market price
- **Buy/Sell**: Recommendation based on the comparison
- **Buy**: When fair price > current price (undervalued)
- **Sell**: When fair price < current price (overvalued)
## Customization in Excel
The generated Excel file is fully editable, allowing you to:
1. **Adjust Growth Assumptions**: Modify the growth rate used in projections
2. **Change Discount Rate**: Update WACC if you disagree with the calculated rate
3. **Modify Terminal Growth**: Adjust the perpetual growth rate
4. **Update Forecasts**: Edit year-by-year projections manually
5. **Recalculate**: All formulas are live and will automatically update
## Use Cases
### Investment Analysis
Determine if a stock is undervalued or overvalued based on fundamental cash flow analysis.
### Portfolio Management
Compare DCF valuations across multiple stocks to identify the best opportunities.
### Due Diligence
Perform detailed valuation analysis for M&A transactions or investment decisions.
### Sensitivity Analysis
Modify assumptions in the Excel file to see how different scenarios affect fair value.
### Educational Purposes
Learn DCF methodology by examining a real-world, automated DCF model.
## Best Practices
1. **Understand the Assumptions**: Review the growth rates and discount rate before making decisions
2. **Consider Multiple Scenarios**: Run DCF for different growth assumptions
3. **Compare with Other Metrics**: Use DCF alongside P/E, P/B, and other valuation methods
4. **Update Regularly**: Regenerate DCF analysis after earnings releases or major events
5. **Industry Context**: Consider industry-specific factors that may affect growth rates
## Technical Details
### Data Sources
- **Financial Statements**: Latest annual and quarterly reports
- **Market Data**: Current stock price, shares outstanding
- **Risk Metrics**: Beta, risk-free rate, market risk premium
- **Growth Metrics**: Historical revenue, FCF, EBITDA, and net income
### Calculations
- **WACC**: `(E/V × Cost of Equity) + (D/V × Cost of Debt × (1 - Tax Rate))`
- **CAGR**: `((Ending Value / Beginning Value)^(1/Years)) - 1`
- **Present Value**: `Future Cash Flow / (1 + Discount Rate)^Year`
- **Terminal Value**: `Final Year FCF × (1 + Terminal Growth) / (WACC - Terminal Growth)`
### Currency
The DCF analysis automatically uses the company's financial reporting currency (e.g., USD, CNY, EUR).
## Limitations
While DCF is a powerful valuation tool, keep in mind:
1. **Garbage In, Garbage Out**: The quality of DCF depends on the quality of assumptions
2. **Future Uncertainty**: Long-term projections are inherently uncertain
3. **Growth Rate Sensitivity**: Small changes in growth assumptions can significantly affect fair value
4. **Not Suitable for All Companies**: DCF works best for companies with stable, predictable cash flows
5. **Qualitative Factors**: DCF doesn't capture competitive advantages, management quality, or industry disruption
## Related Methods
Complement your DCF analysis with these other valuation metrics:
- [`ticker.ttm_pe()`](Value_Examples.md#2-stock-ttm-pe) - Price-to-Earnings ratio
- [`ticker.historical_pb_ratio()`](Value_Examples.md#5-stock-historical-pb-ratio) - Price-to-Book ratio
- [`ticker.historical_ps_ratio()`](Value_Examples.md#4-stock-historical-ps-ratio) - Price-to-Sales ratio
- [`ticker.historical_peg_ratio()`](Value_Examples.md#6-stock-historical-peg-ratio) - PEG ratio
- [`ticker.wacc()`](Value_Examples.md#12-stock-historical-wacc) - Weighted Average Cost of Capital
- [`ticker.annual_fcf_yoy_growth()`](Growth_Examples.md#10-stock-annual-free-cash-flow-yoy-growth) - Free Cash Flow growth
## Example Workflow
```python
from defeatbeta_api import Ticker
# Initialize ticker
ticker = Ticker("AAPL")
# Step 1: Generate DCF analysis
dcf_result = ticker.dcf()
print(f"DCF file saved to: {dcf_result['file_path']}")
# Step 2: Review supporting metrics
wacc = ticker.wacc()
fcf_growth = ticker.annual_fcf_yoy_growth()
revenue_growth = ticker.annual_revenue_yoy_growth()
# Step 3: Open the Excel file and review assumptions
# Step 4: Adjust assumptions if needed
# Step 5: Make investment decision based on fair value vs. current price
```
## FAQ
**Q: How often should I regenerate the DCF analysis?**
A: Regenerate after earnings releases, major company announcements, or significant market changes (quarterly is typical).
**Q: Can I trust the Buy/Sell recommendation?**
A: The recommendation is based on DCF fair value vs. current price, but you should always do additional research and consider other factors.
**Q: What if the growth rate seems too high or too low?**
A: You can manually edit the growth assumptions in the Excel file. The CAGR is calculated from historical data, but future growth may differ.
**Q: Does this work for all companies?**
A: DCF works best for established companies with predictable cash flows. It's less reliable for startups, high-growth tech companies, or companies with volatile earnings.
**Q: Can I use this for non-US stocks?**
A: Yes, the method automatically handles different currencies and works for any ticker supported by the API.
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**💡 Tip**: Combine DCF analysis with qualitative research, industry analysis, and competitive positioning for a complete investment thesis.
