Discounted Cash Flow (DCF) method is one of the popular ways to calculate the intrinsic value of a stock. The argument is that financial ratios only tell us about how the company has performed in the past, and nothing about the future. Hence, it is better to project the company’s worth in the future to today’s value. I have problems with projections because I simply do not believe in it. No one can predict the future accurately and I have seen more incorrect predictions of GDP and inflation rates than correct ones. And these predictions are made by smart economists, not the average Joe like you and me. DCF’s main problem is the over-reliance on predictions.

I will not be going through DCF’s complex formulas in this post as I only want to address the weaknesses of the method. Investopedia has covered well about the method which you can read ...