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Simple DCF Analysis Using Refinitiv LSEG python API
Determining the value of any financial instrument has always been a challenge. While the selling price of an instrument may seem expensive or cheap, establishing its true value is complex. Among the various methods used to estimate the value of a financial instrument, the crown jewel is undoubtedly the discounted cash flow (DCF) method.
The DCF method is based on the realization that a company, or its stock, is essentially a cash flow generating machine. When you purchase a stock, you are paying for the ability of this machine to generate cash flows in the future. The key term here is “future.” To illustrate why this is so important, let’s use the following example: Imagine there exists a machine that will generate $100 in a year’s time. Would you pay $100 for it? Is $100 a break-even price? No, because you have to wait a year to get the $100. This illustrates that:
Money received in the future is worth less today due to the opportunity cost of delaying the usage of that money.
Therefore, future cash flows must be adjusted for this opportunity cost, a process known as discounting, we do this by using a function of time and a discount rate coefficient that reflects the opportunity cost.
