Stock Investor IQ

Unveiling Market Expectations: The Power of the Reverse DCF Calculator

Ever wondered what growth expectations are baked into a stock’s current price? Our Reverse DCF Calculator is here to help you unravel this mystery. By working backwards from the current stock price, this innovative tool determines the implied growth rate in free cash flows, allowing you to assess whether the market’s expectations align with your own growth projections for the business.

Understanding the Reverse DCF Calculator

The Reverse DCF Calculator is a powerful tool that inverts the traditional DCF (Discounted Cash Flow) methodology. Instead of projecting future cash flows to estimate a stock’s intrinsic value, it starts with the current stock price and calculates the growth rate implied by that valuation. This unique approach offers valuable insights into market sentiment and expectations.

Here’s how the Reverse DCF Calculator compares to a traditional DCF calculator:

  • Traditional DCF: Requires inputs about a business’s future growth, margins, terminal value, and discount rate to estimate the stock’s intrinsic value.
  • Reverse DCF: Uses the current stock price, terminal value multiple, and discount rate to determine the implied growth rate in free cash flows.
Reverse DCF Calculator
By using the Reverse DCF Calculator, investors can gauge whether the market’s growth expectations for a stock are realistic or misaligned with their own assessment of the business’s prospects. This information can be invaluable in identifying potential mispricing opportunities in the market.

How to use the Reverse DCF Calculator

Reverse DCF Calculator Demo: Unveiling Market Growth Expectations

Click on the video and expand to full screen to view a demo of the Reverse DCF Calculator.

Detailed instructions are also provided below the dashboard.

If you need a refresher on any of the financial metrics used, our Stock Investing Glossary is just a click away.

Our Reverse DCF Calculator uses a discounted cash flow (DCF) model in reverse to calculate the implied free cash flow growth based on your custom assumptions. Here’s how it works:

  1. Enter the business name or stock symbol in the ‘Business Search’ drop down list (see screenshot example for guidance)
  2. Input your required rate of return (discount rate) for the next 10 years and the terminal price / free cash flow ratio in 10 years time (using the historical results on the right as a guide).
  3. Immediately see the calculated implied free cash flow growth rate which you can compare to historical free cash flow growth.

Reverse DCF Calculator Dashboard

Please suggest improvements to this dashboard by providing feedback in the form on the Contact page.

The Reverse DCF Calculator is a guide only. The accuracy of the data in this website is not guaranteed and it is highly recommended that you perform your own due diligence before making an investment decision by directly reviewing the business’s annual report and accompanying financial statements.  The implied free cash flow growth rate is dependent on the assumptions you enter and past financial performance does not necessarily predict the future.

Detailed instructions for the Reverse DCF Calculator?

Business Search

  • Search for the desired business in the ‘Business Search’ dropdown using the search box (see screenshot example).

Screenshot Example of Business Search

Business search screenshot

User Inputs

  • Select the annual discount rate which is use to discount the projected free cash flows back to today.  The discount rate is your required annual rate of return which should be based on your available investment opportunities.  The default discount rate is 12% p.a. as you would expect to achieve a 9% p.a. return from a diversified equity index fund over the long term and an extra 3% p.a. is added for a margin of safety.  If you cannot outperform an equity index fund with a reasonable margin of safety then it’s preferable to invest in the equity index fund (which is diversified across many stocks).
  • Select the terminal P/FCF ratio in 10 years time which is used to calculate the terminal value of the business.  The default terminal P/FCF ratio is 15.  However, you may adjust this to be 10 or 20 based on your expectations for the future.  A lower terminal P/FCF ratio is more conservative.

Interpreting the results

  • The Implied FCF Growth Rate represents the growth in free cash flows over the next 10 years that is implied by the current stock price.  That is, it represents the annualised free cash flow growth rate that is required for the projected free cash flows and terminal value to equate to the current stock price after being discounted back to today using the assumed discount rate.

Other information

  • The dashboard is best viewed on a desktop device. For the best mobile phone experience, view the dashboard using landscape orientation.

Disclaimer: Stock Investor IQ is not an investment adviser, brokerage firm, or investment company. The information on this website is provided ‘as is’ and may not be accurate or up to date. You must perform your own due diligence before making any investment decisions. We are not liable for any losses or damages arising from the use of this information. See our Terms of Use for more details.

Copyright © 2024 Stock Investor IQ

How can we help you better?

Please tell us what improvements would make your experience on our website better? Feel free to provide details!