Terminal growth
Also called Perpetuity growth rate.
The rate a business is assumed to grow at forever, after the years anyone actually forecast.
Terminal value = final year cash flow x (1 + g) / (discount rate - g)
g is the terminal growth rate, and must be below the discount rateWhat it means
A valuation cannot forecast to the end of time, so it forecasts a few years and then assumes a steady rate forever after. That assumption produces the terminal value, and at most companies it is the majority of the entire valuation.
The rate has to be modest. Anything above the long-run growth of the economy implies the company eventually becomes the economy, which is a statement no valuation should be making by accident.
Worked example
Final-year free cash flow of $274m, 2.5% growth forever, discounted at 9%.
- 1274 x 1.025 = 281.
- 2281 / (0.09 - 0.025) = $4,317m at the end of year five.
- 3Discounted back five years: $2,806m today.
$2,806m — 76% of the whole valuation resting on this one assumption.
Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.
How investors read it
- Between 2% and 3% is the usual range, roughly long-run inflation plus a little. Above 4% needs an argument.
- Always check what share of the valuation the terminal value is. Above about 75%, the model is mostly an opinion about the far future.
- The gap between the discount rate and this figure is what really drives the answer — narrowing it from 6.5 points to 4.5 raises the terminal value by half.
Where it misleads
- The formula divides by the gap between two assumed rates, so it becomes unstable exactly where people are most tempted to push it.
- Assuming any perpetual growth for a specific company is heroic. Most businesses do not last forever.
- It cannot capture a business in structural decline, where the honest terminal rate is negative and the formula stops behaving.
How Materiality uses it
An editable input to the Valuation tab, defaulting to 2.5% and capped at 4%. It must stay at least a point below the discount rate, which the model enforces rather than merely warning about — without that guard the denominator approaches zero and the valuation runs away.
The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.
Work it out yourself
Related metrics
Intrinsic value
What a business is worth based on the cash it can produce, rather than on what it is currently priced at.
Discount rate
The return you require, which is what makes a dollar in five years worth less than a dollar today.
Margin of safety
The gap between what you pay and what you think it is worth — the room to be wrong.
Free cash flow
Operating cash flow less capital expenditure: what the business actually generated for its owners.
A metric on its own is a number without a business attached to it. Materialitycomputes these from a company's own SEC filings, several years of them at once, and explains what the pattern means rather than leaving you to hold fifteen definitions in your head.