What is the main purpose of Discounted Cash Flow (DCF) analysis in valuation?

The main purpose of Discounted Cash Flow (DCF) analysis in valuation is to estimate expected future cash flows. DCF is a financial model that focuses on predicting a company's future cash flows based on its projected revenues, expenses, and capital expenditures. This method is grounded in the principle that the value of an investment is intrinsically linked to the cash it generates in the future.

In a DCF analysis, analysts forecast future cash flows for a specific period and then discount them back to present value using an appropriate discount rate, often reflecting the risk and opportunity cost of capital. This process provides a quantitative measure of a company's worth based on its potential to generate cash in the future, rather than relying on historical data or comparisons with other companies, which may not always be reflective of that particular company's situation.

By focusing on expected future cash flows, DCF allows investors and analysts to evaluate the intrinsic value of a company and make informed decisions about investments based on this fundamental analysis.