Warren Buffett's Discounted Cash Flow: A Real Example

Welcome to Financial Fluency - a newsletter designed to boost your understanding of financial terms and provide you with investment ideas for long-term financial success.

In today’s newsletter:

• A Look at the Markets: S&P 500 & Bitcoin

• Warren Buffett's Discounted Cash Flow: A Real Example

• Quote of the Day: Warren Buffett

• What I’m Watching: Dividendology

• Word of the Day: Trailing Twelve Months (TTM)

• Whenever you are ready, here is how I can help you

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A Look at the Markets: S&P 500 & Bitcoin

S&P 500 $SPX ( ▼ 0.59% ) 

We can see that the S&P 500 is steadily recovering after Trump announced his tariffs in April 2025. These tariffs have been slowly reduced.

Bitcoin $BTC.X ( ▼ 0.86% ) 

Last week, I suggested that Bitcoin might pull back to the previous all-time highs of $108,000.

This is what has happened. I view this as a bullish sign, technically. There is no guarantee that this level will hold but let’s see what happens over the next few weeks.

Warren Buffett's Discounted Cash Flow: A Real Example

A Step-by-Step Guide to Valuing Apple $AAPL ( ▼ 0.14% ) 

Quick Recap: The Theory

Last week, we explored Warren Buffett's approach to intrinsic value through discounted cash flows (DCF). We learned that:

• Money today is worth more than money tomorrow

• Future cash flows must be "discounted" back to the present value

• The discount rate reflects risk, inflation, and opportunity cost

Today, we'll apply this theory to a real company: Apple Inc.

Why Apple Makes a Perfect Example

Apple is ideal for demonstrating Buffett's DCF method because:

• Predictable cash flows – iPhone sales provide steady, recurring revenue

• Strong competitive advantages – Brand loyalty and ecosystem lock-in

• Long-term visibility – Multi-year product cycles and services growth

• Warren Buffett owns it – Berkshire Hathaway holds approximately $60 billion in Apple stock at today’s valuation (300 million shares at $200 a share).

Apple's Expected Cash Flows (Next 5 Years)

The first step is to find Apple's current free cash flow. For this, I use Yahoo Finance.

📌 Note: Apple's fiscal year ends in September, not December.

1. Go to https://uk.finance.yahoo.com

2. Search for the stock you are interested in – in this case, Apple

3. Click on 'Financials'

4. Click on 'Cash Flow'

5. Look for 'Free Cash Flow' at the bottom of the table for the last financial year (September 2024)

This information indicates that the company's free cash flow for the last financial year was $108,807,000,000 (the table shows numbers in thousands - add ‘000’).

However, I have observed a significant decline in free cash flow over the past 12 months. This figure is presented in the first column of the table and is labelled TTM (Trailing Twelve Months).

In this case, the figure has been calculated from the end of March 2024 to the end of March 2025 (i.e. the first 2 quarters of Apple’s financial year).

The TTM cash flow is $98,486,000,000. Considering that this value is nearly 10% lower than the 2024 figure, I will adopt the TTM value, which is more conservative.

We now need to estimate Apple's annual free cash flow growth over the next five years. While Apple's average growth rate over the past five years has been 8%, I'll use a more conservative 6% to account for Apple's maturing business, larger scale and not yet fully embracing AI (in my opinion). This is an assumption, and you can refer to the internet or an AI model like ChatGPT to gauge the opinions of other analysts.

This leads us to the next assumption – the discount factor. For this, I am going to use the current US 10-year bond rate (4.5%) plus a 2.5% risk premium. This gives us a value of 7%.

Discounted Cash Flow (DCF) Calculation

To calculate the present value of Apple's future cash flows, we use this formula:

Present Value = Free Cash Flow ÷ (1 + Discount Rate)ⁿ

where ‘n’ is the number of years

Note: these figures are from halfway through Apple’s financial year (March 2025). In theory, we only need to discount this year’s cash flow by 6 months but we are being conservative.

Using these assumptions, we get discounted cash flows as shown in the table below:

This gives a present value of $451.8 billion for the projected free cash flows.

What About Beyond 2029?

However, this is only part of the calculation for the value of the company. Apple will still be producing free cash flows at the end of the 5 years we have calculated.

The value of all future cash flows after this period is called the terminal value, and the discounted terminal value will make up the major part of today's valuation.

We will examine the terminal value in next week's newsletter and calculate a total valuation of Apple based on discounted cash flows.

Key Terms:

• Free Cash Flow: Cash a business generates after paying for operations and investments

• TTM (Trailing Twelve Months): The most recent 12-month period of financial data

• Terminal Value: The estimated value of all cash flows beyond your projection period

As always, none of this is financial advice. Everyone should invest according to their personal circumstances, risk tolerance and financial goals.

Quote of the Day: Warren Buffett

This quote reminds us not to just look at the price when valuing something such as a company. A low price doesn’t guarantee a good deal.

What I’m Watching: Dividendology

Word of the Day: Trailing Twelve Months (TTM)

Trailing Twelve Months (TTM) - compound noun - a financial metric that represents the data from the most recent 12 consecutive months, used to provide a current and comprehensive view of a company's financial performance.

From "trailing" (meaning "following behind" or "covering the period up to now") + "twelve months" (a full year), it is commonly used in financial analysis to smooth out seasonal effects and reflect the latest business trends.

Context and Usage

TTM is often used by investors, analysts, and financial professionals to evaluate a company’s recent performance without waiting for the end of a fiscal year. It aggregates financial data such as revenue, earnings, or cash flow over the last twelve months, ending at the most recent month or quarter reported. This approach provides a timely snapshot that can be more relevant than annual or quarterly reports alone.

Common Collocations

• Trailing twelve months revenue – The total revenue generated over the last twelve months.

• Trailing twelve months earnings – The net income reported for the last twelve months.

• Trailing twelve months cash flow – The cash flow from operations over the most recent twelve months.

• Calculate trailing twelve months – To sum up financial data for the past twelve months to analyze trends or performance.

Business Example:

The analyst reviewed the company’s trailing twelve months earnings to assess its profitability trend before recommending an investment.

TTM is a practical tool for financial decision-making, offering a rolling measure of performance that updates as new data becomes available, thus helping to avoid distortions from seasonal or one-time events.

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.