"When thrown at a target it causes a 3x3 yard explosion of flames (same as the Fireball spell) around a target within the line of sight of the caster, doing fire damage to all targets within its blast."
The Demon Fire potion acts exactly like a Fireball spell: the affected area is the same, and it does the same damage as if the hero had cast the spell. However, unlike the Fireball spell. the potion's damage cannot by increased (by Pyromancy, for instance). The Demon Fire deals fire damage, so enemies with fire resistance will suffer less damage. It costs 500 gold.
The potion's effectiveness depends on the stage of the game: in the first few week, the damage dealt is significant, given the foes encountered. Later, the opponents are usually tougher, and even if the Demon Fire deals more damage as the hero gains levels, the potion cannot deal much harm to the enemy army anymore.
The potions can be thrown anywhere in the line of sight of the owner, not necessary at a creature/hero.