Reverse DCF — What Growth Is Priced In?

Why invert the question?

A normal DCF asks you to predict a decade of growth and spits out a "fair price" — garbage in, gospel out. The reverse DCF is more honest: the market has already voted with a price, so solve for the one input that makes the model agree with reality. Then the only question left is one a human can actually judge: is that growth rate plausible for this business?

The two-stage model

Earnings grow at the implied rate g for the high-growth years, then settle into slow terminal growth forever. The price is the present value of both stages, discounted at your required return:

Garbage in, garbage out

The growth rate you get out is the growth of whatever you put in. Feed it earnings per share and you get implied earnings growth; feed it free cash flow per share and you get implied cash-flow growth. FCF is the cleaner input — it's actual cash, not accounting. Never mix the two, and use per-share figures so buybacks are reflected.

Worked example

Share price $150, EPS $5, your required return 10%, 10 high-growth years, 3% terminal growth. The implied growth rate is 12.6% a year for a decade. The zero-growth value — what today's earnings alone are worth — is just $59. So $91 of the $150 price, nearly two-thirds, is a bet on sustained double-digit growth. Plausible for an exceptional compounder; a fantasy for an average business.

Caveats worth knowing

• Constant growth is a fiction. No business grows 12.6% like clockwork for ten years. Treat the implied rate as an average hurdle, not a forecast.
• The discount rate is a judgment call. A higher required return mechanically raises the implied growth — that's why the sensitivity table exists. Argue with the rate, not just the answer.
• One metric, not a thesis. This says nothing about debt, dilution, moats, or management. It's a lens for the price, not a buy signal.