Like the income capitalization approach, the discounted cash flow (DCF) method is one of the forward-looking valuation methods. In this method, the focus is not on the current enterprise value, but on the future development and the potential value due to the discounting of income generated in the future. For this purpose, a valuation date is determined as of which all cash flows of the respective company are discounted. With the aid of discounting, this analysis (using the entity or equity method) of future earnings and developments provides a realistic picture of a company's current situation.
Although both the DCF method and the capitalized earnings method are future valuation methods, they are not based on the same principle. While the DCF approach includes all cash flows (profits, expenses and taxes), the income approach is based only on future earnings.