Discounted Cash Flow (DCF) is a valuation method that estimates the present value of future cash flows by applying a discount rate that reflects the time value of money and investment risk. DCF analysis is fundamental to equity valuation, bond pricing, and investment decision-making across financial markets. The method considers both the timing and risk of expected cash flows.

DCF models require assumptions about future cash flows, growth rates, and appropriate discount rates, making them sensitive to input variables. While widely used for fundamental analysis, DCF valuations can differ significantly from market prices during periods of high volatility or irrational market behavior. Professional analysts often use DCF alongside other valuation methods for comprehensive analysis.

Real-world example: An analyst values a dividend-paying stock using DCF, projecting $5 annual dividends growing at 3% annually and discounting at 8%, arriving at a fair value of $103 per share compared to the current market price of $95.