Discounted Cash Flow (DCF) is a financial valuation method used to estimate the *present value* of an investment or business based on its *expected future cash flows*.
The core idea: *money today is worth more than money tomorrow*, due to the time value of money. DCF discounts future expected cash flows back to their present value using a discount rate (usually the cost of capital).
| Includes non-cash? | Yes (depreciation, etc.) | No |
| Timing of transactions | Matches earnings period | Based on actual cash movement |
| Found on | Income statement | Cash flow statement |
| Reflects profitability? | Yes | No, it reflects liquidity |
| Negative while other is positive?| Yes | Yes — e.g., due to non-cash charges |
*** 🔍 Example
- A company sells $10,000 of goods but hasn’t been paid yet.
- Net Income: Shows the $10,000 as revenue.
** Is net income more similar to cash flow in terms of a tech stock?
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That is, do we effectively consider it the same when doing evaluations for tech stocks as opposed to other industries?
Great question — and the answer is *no*, net income is not considered equivalent to cash flow, even for tech stocks — though the relationship can be closer or more misleading depending on the business model.
*** ✅ Tech Stocks Often Emphasize Free Cash Flow (FCF) More Than Net Income
Why?
- Tech companies (especially SaaS) tend to have:
- High non-cash expenses (like stock-based compensation and depreciation of capitalized R&D)
- Deferred revenue (prepaid subscriptions)
- Low capital expenditure needs
These factors can cause net income to look worse than actual cash performance.
So analysts often disregard net income in favor of:
| Utilities | Net Income + Dividends | Stable earnings, regulated cash flow |
| Oil & Gas | EBITDA / FCF | High depreciation, volatile capex |
| Banks | Net Income (GAAP adjusted) | Highly regulated balance sheets |
*** 🧠 Conclusion
- No, net income ≠ cash flow for tech stocks
- In fact, net income may understate performance due to:
- High non-cash expenses (e.g., stock comp)
- Accounting rules around R&D and subscriptions
- DCF models for tech should focus on FCF or adjusted EBITDA, not just net income - Cash Flow: $0 until cash is actually received.
** CapEx – Capital Expenditures
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*** What is CapEx?
CapEx stands for *Capital Expenditures* — it refers to money a company spends to acquire, upgrade, or maintain physical assets such as:
- Equipment
- Buildings
- Vehicles
- Technology infrastructure
- Property
*** In Plain Terms
CapEx is money spent on things that last more than one year — unlike operating expenses (OpEx), which are day-to-day costs like rent, salaries, or utilities.
*** Accounting Treatment
- CapEx is not expensed all at once on the income statement.
- It’s capitalized — added to the balance sheet as an asset — and then depreciated over time.
- High-growth tech companies often have low CapEx, which boosts FCF and valuation.
- Asset-heavy companies (like telecom, energy, or manufacturing) have high CapEx, reducing FCF.
** EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization
*** What is EBITDA?
EBITDA is a measure of a company’s core operational profitability. It strips out the effects of financing decisions, tax environments, and non-cash accounting items like depreciation and amortization.
