Reverse DCF Calculator

The problem with a normal DCF

A forward discounted cash flow asks you to forecast a decade of cash flows and then reports what the company is worth. The trouble is that the answer is mostly your own growth assumption handed back to you. Nudge it two points and the valuation moves enormously, so the exercise reliably confirms whatever you believed before you opened the spreadsheet.

It is worse than that, because the forecast is not even the bulk of the answer. On a ten year model roughly 60% of the value sits in the terminal value, a single line standing in for everything after year ten. The decade everybody argues about is the minority of the result.

So run it backwards

The price is the one number in the whole exercise you can observe. Take it as given, and solve for the growth rate it requires.

That converts an unanswerable question into a checkable one. You no longer have to predict anything. You only have to judge whether the future the price implies is plausible, and how often this company has managed anything like it before. That is a question with evidence attached.

What is inside

• Inputs, five numbers: share price, diluted shares, net debt, free cash flow and your cost of capital. All from the filings or the screen, none of them a forecast.
• Solver, a thirty-step bisection laid out on the sheet. You can watch the search narrow row by row. No macros, nothing to enable, nothing hidden.
• Sensitivity, the implied growth across a grid of cost of capital and terminal growth, because those are the two numbers nobody can verify and pretending otherwise would be dishonest.
• Cheat Sheet, where in a filing each input comes from, including which share count to use and what to check about free cash flow.
• Every output is a live formula. Change any input and the solver re-runs.

How to actually use it

Normalize the cash flow first. If the last twelve months were unusual, the implied growth is measured off a distorted base. The normalized earnings worksheet computes a mid-cycle figure from ten years of margins, and the input cell is separate so you can substitute it.

Compare the implied rate with history, not with your instinct. Pull five and ten year growth from the filings. The comparison is the entire exercise. A price requiring an acceleration the company has never achieved is not proof of anything, but it is a specific claim you can examine.

Check the sensitivity before you conclude. If the implied growth is demanding at every cost of capital you would defend, the conclusion is robust. If it flips from demanding to modest across a range you cannot distinguish between, the honest answer is that this method cannot tell you much about this company.

What reversing it does not fix

It removes the growth assumption. It does not remove the others, and this is worth being plain about because most write-ups treating reverse DCF as a trump card skip it.

You still choose a cost of capital, which nobody can observe. You still choose a terminal growth rate. Across a plausible range of those two, the same business can value from 1,899M to 3,300M, a spread of 74%. Reversing the calculation makes the growth assumption explicit rather than hidden. It does not make the model objective.

It also assumes free cash flow is the right measure, which it is not for every business. Banks and insurers do not work this way at all, because their balance sheet is the business. For those, price to tangible book against return on tangible equity is the framework, and that is a different tool.

Found an error, or think a calculation should work differently? Tell me. Corrections get published with a date attached, the same as they do for the research reports.