Is a DCF a crystal ball, or a mirror for your assumptions?

Before we build one, let's be honest about what a DCF is for — because misunderstanding this is how smart people fool themselves with a spreadsheet.

A DCF does not predict; it exposes

A DCF produces a precise-looking number: "€142.60 per share." That precision is a trap. The number is only ever as good as the assumptions you fed it — the growth rate, the margins, the discount rate, the terminal value. Change any of them slightly and the answer moves, often a lot (we'll prove this in the last unit).

So the honest way to see a DCF is not as a crystal ball that tells you the future, but as a mirror that reflects your own beliefs back at you, made explicit and priced. Its real gift is that it forces you to state what you believe — "revenue grows 6% a year, margins hold at 20%, this is worth an 8% discount" — where those beliefs can be examined and argued with.

Reverse the telescope

The most powerful use of a DCF isn't computing a value at all — it's running it backwards. Take today's market price and ask: what would a company have to do to justify it? If the current price only makes sense at 25% growth for a decade, that is an observation about how optimistic the market already is. You're not predicting; you're reading the assumptions baked into the price.

The mindset for the rest of the course

• A single-point DCF answer is the least interesting output. The range and the drivers are the point.
• "My model says it's worth more than the price" is not a verdict on the company — it's a statement that your assumptions differ from the market's. One of you is wrong, and humility says it might be you.
• We compute value first, look at price second, and never let the price we want to see leak backward into the assumptions.

Try it now

Reverse the telescope with two numbers. The price:

And the cash:

1. Divide market capitalisation by free cash flow. Roughly, how many years of today's cash would it take to add up — undiscounted — to what the market is charging? A big number means the market expects a lot of growth.
2. Ask the reverse question in one sentence: "What growth would this price require to make sense?" You do not need the exact figure — just feel the assumption the price is quietly making.
3. Now do it for a company the market clearly expects a lot from. The price tag and the cash for NVIDIA, in one table:

Divide market capitalisation by free cash flow and set the result beside Apple's from step 1. The number is itself the observation, whichever way the comparison falls. 4. Write your one-line contract for this course: "A DCF shows me my assumptions; it does not show me the future." Keep it visible while you build the next unit.