Reverse DCF Calculator (Implied Growth)

About the Reverse DCF Calculator (Implied Growth)

A discounted cash flow (DCF) model starts from a forecast of growth and gives a value. A reverse DCF runs the other way: it starts from the value the market puts on a company today and works out the yearly growth of cash flow (FCF: cash from operations minus capital spending) that value already assumes, at the discount rate, horizon and long-run growth you choose. You can then judge whether that growth looks easy, demanding or out of reach for the business.

Enter the market capitalisation and the net debt (or the share price and the number of shares), the last year’s FCF, your discount rate, the number of years of growth and the terminal growth after them; growth can stay flat or fade towards the terminal rate. The calculator gives the implied growth, the check that it reproduces the value, the cash flow it means in the last year, the share of the value that comes from the terminal value, and a table of the implied growth at other discount rates and terminal growth rates.

It works for any company and currency. It describes what the price assumes under your inputs; it does not say what the share is worth.

Common uses

• See what growth today’s price of a company you follow already assumes before forming your own view.
• Compare the growth two companies’ values assume at the same discount rate.
• Test how much the answer depends on the discount rate and the long-run growth.
• Turn a valuation multiple into the growth it implies, in plain cash-flow terms.

The formulas

• Enterprise value = market capitalisation (or price × shares) + net debt.
• The DCF: EV = Σ FCF₀(1 + g)ᵗ ÷ (1 + r)ᵗ for t = 1 … N, plus the terminal value FCF_N(1 + g_T) ÷ (r − g_T), discounted by (1 + r)ᴺ — the stable-growth terminal value of Damodaran’s valuation notes, which also explain why the terminal growth must stay below the discount rate and near the economy’s growth.
• Reverse: the calculator finds the g that makes the DCF equal the enterprise value, by bisection between −50% and 100% a year — the approach of Rappaport and Mauboussin’s Expectations Investing: start from the price and ask what it implies.
• Fade: the growth of year t = g + (g_T − g) × (t − 1) ÷ (N − 1), so year N grows at the terminal rate.

Reading the results

• The implied growth is what the cash flow has to grow by each year, for the years you chose, for today’s value to be earned at your discount rate. Compare it with what the business has done and what it could do.
• The terminal value share shows how much of the value depends on what happens after the forecast years: the higher it is, the more the answer moves with the terminal growth and the discount rate.
• The sensitivity table gives the implied growth at discount rates 2 points either side of yours and terminal growth 1 point either side.

What it leaves out

The choice of the inputs, which is yours: a cash flow that was unusually high or low in the last year, a discount rate that does not fit the business, or a terminal growth above the economy’s will each change the answer a lot. It does not adjust for dilution, minority interests, leases or other claims you do not include in the net debt.

Limitations

• Needs a positive FCF; a loss-making year needs a normal year’s figure instead.
• Growth between −50% and 100% a year; outside that, the tool says which way it lies.
• One stage of growth (flat or fading) and a terminal value; no separate forecasts year by year.
• It describes what a value assumes under your inputs; it is not a valuation and says nothing about the share’s price.

Privacy

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