Reverse DCF calculator

A normal DCF asks you to guess the future and tells you what the company is worth. A reverse DCF turns that round: it takes the price the market is charging today and works out what the market must be assuming to justify it.

This is often the more answerable question. Forecasting a company's growth for five years is hard and you will usually be wrong. Judging whether 14% a year is plausible for a business you understand is a great deal easier, and that is the question a reverse DCF puts in front of you.

There is no formula that solves for the growth rate directly, so the calculator searches for it. Equity value rises steadily as the growth assumption rises, which means there is exactly one rate that matches any given price.

Find g such that:
market value = sum of FCF(0) x (1 + g)^t / (1 + d)^t  +  TV / (1 + d)^5
                + cash - debt

The same company: $1,000m of free cash flow, $500m cash, $200m debt, discounted at 10% with 2.5% terminal growth. The market values the equity at $17,502m.

1. 1At 0% growth the model produces $12,577m, which is below the market value.
2. 2At 15% growth it produces $23,093m, which is above it.
3. 3The answer is somewhere between, and narrowing the range converges on 8%.

• The number is a hurdle, not a forecast. It is what has to happen for today's buyer to earn the return they used as the discount rate.
• Compare it against what the company has actually done. A price implying 20% from a business that has grown 4% for a decade is telling you something specific.
• Compare it against the industry too. Implied growth well above the market a company competes in means the price assumes it takes share from someone.

• Reading the implied rate as a prediction. It is the market's break-even assumption, and markets are frequently wrong in both directions.
• Changing the discount rate to make the implied growth look reasonable. The two trade off directly, and tuning one to flatter the other tells you nothing.
• Forgetting that the implied rate depends entirely on the terminal assumptions. A different terminal growth rate produces a different implied growth rate from the same price.

What each of these inputs actually is, where it comes from in a filing, and where it misleads.