Valuation
Reverse DCF
Working backwards from the share price to find what growth the market is already assuming.
How it works
Rather than forecasting cash flows to produce a value, a reverse DCF takes the current price as given and solves for the growth rate that would justify it.
It converts the question from "what is this worth", which nobody can answer confidently, to "is this expectation reasonable", which is often answerable.
Worked example
If the price only makes sense with 25% annual growth for a decade, the question becomes whether a company of that size has ever managed it.
Related terms
- Discounted cash flowValuing a business by estimating its future cash flows and converting them to today’s money.
- Discount rateThe rate used to convert future money into what it is worth today.
- Terminal valueThe estimated value of all cash flows beyond the explicit forecast period in a valuation.
- ExpectationsWhat the market already assumes about a company’s future, which its current price encodes.
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.