In a DCF analysis, how is enterprise value estimated?

In a discounted cash flow (DCF) analysis, enterprise value is estimated as the present value of future cash flows generated by the business. This approach focuses on the expected future cash flows that the company will produce and discounts them back to their present value using an appropriate discount rate, typically the weighted average cost of capital (WACC).

By projecting free cash flows, which account for the cash that can be distributed to investors after all operating expenses, taxes, and investments in working capital and fixed assets are taken into consideration, the DCF model captures the core operational value of the firm. The cash flows are then discounted to reflect the time value of money, hence arriving at an accurate estimate of the enterprise's worth.

This method stands in contrast to measures like the total assets minus total liabilities, which provides a historical snapshot of value rather than considering future performance, or cash and cash equivalents that only account for liquid assets at a specific time rather than the holistic value derived from operations. Therefore, estimating enterprise value through the present value of future cash flows effectively captures the intrinsic value of the company's ongoing business activities.