Reverse DCF Calculator (Implied Growth Rate)
Turn a discounted cash flow model around: find the free-cash-flow growth rate the current share price implies, given your discount rate, growth period and terminal growth.
How it works
Price = Σₜ₌₁…N FCF × (1 + g)ᵗ ÷ (1 + r)ᵗ + [FCF × (1 + g)ᴺ × (1 + g∞) ÷ (r − g∞)] ÷ (1 + r)ᴺ · solve for g (bisection) · r = discount rate, g∞ = terminal growth, N = growth period
A normal DCF asks “what is this stock worth if cash flow grows at my estimate?”. A reverse DCF, popularised by Michael Mauboussin and Alfred Rappaport in Expectations Investing, asks the opposite: what growth must the company deliver to justify today’s price? You then judge whether that implied growth is realistic compared with the company’s history, its industry and the economy. It avoids anchoring on your own optimistic forecast, and it is especially useful for expensive growth stocks where most of the value sits in the terminal value.
Worked example
A share priced at 150 with free cash flow of 5 per share (a 3.33% FCF yield, 30× FCF), a 9% discount rate, a 10-year growth period and 2.5% terminal growth implies that free cash flow must grow 11.01% a year for 10 years — to about 14.21 per share — to justify the price. If cash flow stayed flat the shares would be worth only 65.39, and 63.1% of the price comes from the terminal value.
Sources: Expectations Investing — Mauboussin & Rappaport · Wikipedia — Discounted cash flow
Frequently asked questions
What is a reverse DCF?
It is a discounted cash flow model solved backwards: instead of estimating growth to get a value, it takes the current price as given and finds the growth rate the market is implicitly expecting.
How do I interpret the implied growth rate?
Compare it with the company’s past free-cash-flow growth, analysts’ forecasts and the growth of its market. If the price requires growth well above what is plausible, the stock leaves little room for error.
Which discount rate should I use?
Use your required return for a stock of this risk — often 8% to 10% for large companies, or the company’s cost of equity from CAPM. A higher rate raises the growth needed to justify the price.
Why does the terminal value matter so much?
For most companies more than half of the DCF value comes from cash flows after the growth period. Small changes in the terminal growth or discount rate move the implied growth a lot.
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Educational estimate, not investment advice. Returns, defaults, rates and exchange rates are uncertain and past results do not guarantee future ones — consider independent professional advice before investing.