What is the primary use of DCF in financial analysis?

The primary use of Discounted Cash Flow (DCF) in financial analysis is to calculate the value of an investment. DCF is a valuation method that estimates the value of an investment based on its expected future cash flows, which are adjusted for the time value of money. This approach recognizes that a dollar received in the future is worth less than a dollar received today due to factors like inflation and risk.

By forecasting the cash flows that an investment is expected to generate in the future and then discounting those cash flows back to their present value using a specific discount rate, investors can determine the intrinsic value of an investment. If the DCF value exceeds the current market price, it may indicate that the investment is undervalued and could be considered a good opportunity.

Using DCF for predicting market trends, assessing current market prices, or ensuring liquidity does not capture the essence of its intended purpose, which is to provide a systematic approach to estimating an investment's worth based on its projected financial performance.