AlphaStocks

Reverse DCF Calculator

A DCF asks what a stock is worth if the business grows at a rate you pick. A reverse DCF turns the question around: given today's price, what growth rate is the market already assuming? Load a ticker or enter your own figures. The math runs in your browser.

Fills in what AlphaStocks publishes for the stock; you supply the rest.

Or EPS as a proxy for a mature business

Your required return on the shares (cost of equity)

Must be below the discount rate

Implied cash flow growth, years 1-5
4.9%
Share of the price from years 6+
74.5%

At $35.00, the price assumes cash flow per share grows 4.9% a year for five years, then 2.5% a year forever, discounted at 9.0%. Compare that with what the business has actually grown.

Implied growth by discount rate (rows) and terminal growth (columns)
Discount \ Terminal2.0%2.5%3.0%
8.0%2.7%1.1%-0.6%
9.0%6.3%4.9%3.4%
10.0%9.6%8.4%7.1%

Arithmetic on the inputs above, not a forecast or investment advice.

How the reverse DCF works

It uses the same two-stage model as the DCF calculator, per share:

  1. Value at a growth rate g. Cash flow per share grows at g for five years, then at the terminal rate forever: V(g) = Σ CF × (1 + g)t / (1 + r)t + TV / (1 + r)5, with TV = CF5 × (1 + gT) / (r − gT).
  2. Solve for g. The value rises with g, so there is one growth rate at which V(g) equals the share price. The calculator finds it by bisection between −50% and 100% a year, and says so when the price lies outside that range.
  3. Read it against history. Implied growth is only informative next to what the company has actually delivered. If the price needs 15% a year from a business that has grown 5%, the market is more optimistic than the record.

Worked example(the calculator's starting inputs): a $35 share with $2.00 of free cash flow per share, discounted at 9% with 2.5% terminal growth. With no growth at all, that cash flow is worth $28.28 a share, so the price assumes some. Solving gives 4.9% a year for five years: cash flow per share reaches $2.54 in year 5, and 74.5% of the price comes from the years after that.

Which cash flow and which discount rate

Per share and to equity.The model compares a per-share cash flow with a share price, so use cash flow that belongs to shareholders: free cash flow to equity, or earnings per share for a mature business whose capital spending is close to its depreciation. Then discount at the return you require on the shares (the cost of equity), not the company's blended cost of capital, and do not subtract debt again.

Why loading a ticker fills in EPS.AlphaStocks publishes each stock's price and trailing P/E, from which trailing EPS follows exactly (price ÷ P/E). Free cash flow per share is not in the public data yet. Where cash flow and earnings differ a lot, such as heavy capital spending or large non-cash charges, replace EPS with free cash flow from the latest annual report.

Read the grid, not one cell. In the example, moving the discount rate one point either way moves implied growth from 1.1% to 8.4%. The table under the result shows that spread for your inputs.

Limitations

Negative or zero cash flow is refused: no growth rate makes it worth a positive price. Banks and insurers fit poorly, because their cash flows mix operating and financing activity. The five-year horizon and a single growth rate are simplifications; the answer is a way to read the price, not a forecast.

Related

DCF CalculatorBenjamin Graham Number CalculatorWhat Is Intrinsic Value?How AlphaStocks values stocks

This calculator is for educational purposes only and is not investment advice. Its results depend entirely on the inputs you choose. AlphaStocks is not a registered investment adviser. Do your own research and consult a qualified financial adviser before making investment decisions.