The Best Books On Discounted Cash Flow

Whether you plan on investing in the stock market, you’re trying to analyze a company, sell a business, or you’re just wondering whether or not you should invest more money into your existing business, then you need to understand the concept of discounted cash flow. Basically, it’s a method of evaluating the potential return on an investment before investing your hard-earned money. So, what are the best books on discounted cash flow? 

Some of the best books on Discounted Cash Flow are Valuation Techniques by Jason Voss, The Intelligent Investor by Benjamin Graham, Equity Asset Valuation by John Stowe, Financial Modeling For Equity Research by John Moschella, and Discounted Cash Flow by Lutz Kruschwitz.

Discounted Cash Flow

While you don’t need to read all of these books to understand the concept of discounted cash flow, reading at least one of them will greatly expand your knowledge of the subject. After reading some material, you’ll have added some valuable tools to your arsenal that will help you make smarter investments in the future.

Today, I’m going to go over the basics behind the concept of discounted cash flow and show you some of my favorite books on the subject! 

My Top 4 Books On Discounted Cash Flow

Now that you know some of the basics about what discounted cash flow is and how it works, I’m going to show you my favorite books on the subject. While they’re all great reads, they are somewhat lengthy books, so it’s best to stick to reading one or two of them at a time. If you can find any of them in audiobook format, that’s also a good way to consume them while you’re in the car, at the gym, or walking around the world. 

1- Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options by Jason A. Voss [Link]

Valuation Techniques is at the top of my list because it incorporates small nuggets of knowledge and information from some of the other books I’ve listed below. This expansive work, written by Jason Voss and edited by two leading experts from the CFA Institute, explains and breaks down some of the leading valuation theories and methods for calculating discounted cash flow. 

From showing you examples of financial models to in-depth explanations of specific valuation situations, you’ll learn how to analyze stocks, ETFs, large corporations, and even small businesses to figure out whether or not they’re going to produce a positive discounted cash flow. 

2- The Intelligent Investor by Benjamin Graham [Link]

Benjamin Graham’s The Intelligent Investor is a classic investment and valuation resource that everybody should read. Although some of the man’s views and methodology are contained in the book above, this is his original masterpiece and contains all of his investing secrets. 

Although the book was written over 70 years ago, much of the knowledge and information is incredibly accurate and applicable to today’s financial world. Where updates are needed, the financial journalist Jason Zweig offers his perspective and commentary throughout the book. 

3- Equity Asset Valuation by John Stowe [Link]

John Stowe’s Equity Asset Valuation provides readers with a solid, easy-to-understand foundation on the principles of market valuation techniques and theory. Although it doesn’t provide readers with some of the more advanced valuation theories, it does cover all of the basics.

You’ll learn about discounted cash flow, how to determine an investment’s true worth, and various factors that you should take into consideration before purchasing a stock or investing your money into a business. 

4- Financial Modeling For Equity Research: A Step-by-Step Guide to Earnings Modeling and Stock Valuation for Investment Analysis by John Moschella [Link]

Let me just start by saying this book has been incredibly helpful to me. Unlike some of the other books I’ve mentioned, which use a lot of Wall Street jargon and financial terminology, Financial Modeling For Equity Research is written in a manner that’s easy for beginners to understand. 

The author, John Moschella, was inspired to write the book based on his own experience on Wall Street. In his early days, he had to balance working intense overtime with studying and reading outside of work. His motivation for writing this book was to give young investors the easy-to-read information that he wished he had. 

Discounted Cash Flow In Simple Terms

Let’s say that you own a small construction business, for example. So far, the business is doing well, you’re turning a decent profit, and you’re fairly happy with the direction the business is going in. However, you’ve got some big jobs coming up shortly, and you think that you might need to buy a small bulldozer to save you from having to sub-contract another company with a bulldozer. 

The one thing is- bulldozers are expensive. Before you go out and spend a lot of money on one, you’ll want to sit down with your accountant and figure out whether or not it’s a good investment or not. As long as the bulldozer can pay for itself and make you a profit over the next few years, then it’s generally a good investment. On the other hand, if it can’t make you the profit that you need, then it would be a bad investment, and you’d be better off dealing with your sub-contractor. 

In order to evaluate this, your accountant will likely use a formula for calculating the discounted cash flow that the potential asset will produce. They’ll take things into account such as:

  • How much does the asset cost? 
  • How much will it cost to insure the asset? 
  • What are the average maintenance costs? 
  • How much potential profit can the asset generate? 
  • Will owning the asset open the doors to new jobs and clients? 

If they can crunch the numbers and calculate the asset will make you money over time, then that means it will have a positive discounted cash flow. 

Although this was a more simplistic example, the same valuation process also applies to investments such as:

  • Investing in the stock market by purchasing stocks, ETFs, or index funds
  • Investing in a start-up company. 
  • Starting a new business. 
  • And more!