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Reverse DCF

A reverse discounted-cash-flow model starts from today’s price and solves for the growth in free cash flow that price assumes, instead of guessing the growth and computing a value.

A normal DCF model forecasts a company’s future free cash flow, discounts it back to today and calls the result a value. Every input is a guess, and small changes to the growth rate move the answer a lot.

A reverse DCF turns the question around: it holds the discount rate and the long-run growth fixed, takes the enterprise value the market puts on the company today, and solves for the yearly free-cash-flow growth that makes the two match. The output is a statement about the price (“it assumes about 15% a year for ten years”), not a target.

stocks-llm sets that implied growth beside the growth the company actually delivered over the last three and five years, so a reader can judge whether the assumption looks easy or demanding. It is a simple model with fixed assumptions, and banks, insurers and real-estate companies are not read this way.

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Related terms

  • Market capitalization — Market capitalization (market cap) is the total value of a company’s shares — its share price multiplied by the number of shares outstanding.
  • P/E ratio (price-to-earnings) — The P/E ratio divides a company’s share price by its earnings per share, showing how much investors pay for each dollar of profit.
  • PEG ratio — The PEG ratio divides a company’s P/E by its earnings-growth rate, so a fast grower and a slow grower can be compared on valuation more fairly than by P/E alone.
  • EV/EBITDA — EV/EBITDA compares a company’s enterprise value to its earnings before interest, taxes, depreciation, and amortization — a capital-structure-neutral valuation measure.
  • EBITDA — EBITDA is earnings before interest, taxes, depreciation, and amortization — a measure of operating profitability that ignores financing and non-cash charges.

See more terms in the stocks-llm glossary.

Informational only — NOT financial advice. This is an educational definition, not a recommendation to buy or sell anything. Metrics on stocks-llm are delayed data and may be missing or stale. Always verify information independently and consult a qualified financial professional before making any investment decision.