Discounted Cash Flow [Concepts Series]

Economics nerds always complain that you should never compare stocks to flows. It’s meaningless to say that one company’s cash on hand is bigger than a country’s GDP, for example, because GDP is quoted in dollars per year and cash on hand is a cumulative quantity. It’s like saying a plane is faster than the distance from New York to Boston. Does not compute.

There’s a giant exception, though: stocks, bonds, loans, and other financial products explicitly exist to convert flows to ‘stocks’ in the economic sense. The mechanics of this are worth understanding…