Company valuation
A normal DCF estimates the future and derives a fair value. A reverse DCF keeps today's price fixed and asks which future the market price already assumes.
Core idea
A share price is not neutral. It contains expectations about growth, margins, investment and risk. The reverse DCF does not first try to prove the price wrong. It makes the assumptions inside the price visible, then asks whether you would accept them deliberately or only because the price is already high.
Recap
A discounted cash flow model brings future free cash flows back to today. A terminal value represents the period after the forecast, discounted with WACC.
A normal DCF produces a value under named assumptions. The reverse DCF starts at the second step: the market price.
Method
In a normal DCF, growth, margin and discount rate are inputs and enterprise value is the result. In a reverse DCF, current market price is fixed and one assumption is varied until the model reaches that price.
Hold as much as possible constant. Ask, for example, which ten-year revenue growth would explain the price if margin stays unchanged, or which operating margin would be needed if growth follows the historical path. Change one variable at a time; moving every lever at once creates arbitrary stories.
Example
The following company is constructed to show the method, not to value a real share. Last free cash flow is €80 million, WACC 8%, forecast period ten years, long-term growth 2%, 50 million shares and no net debt. The share price is €75, so equity value is €3.75 billion.
| Assumption | Value |
|---|---|
| Last free cash flow | €80m |
| WACC | 8% |
| Forecast period | 10 years |
| Long-term growth | 2% |
| Shares | 50m |
| Solid path (8% growth / 15% margin) | €43.20 per share |
| Current price | €75.00 |
With 8% annual revenue growth and a 15% operating margin, the model gives €43.20 per share. The price is well above this solid case. That does not automatically mean the share must fall; it means the market requires more than a quiet continuation.
Scenarios
| Scenario | Growth | Margin | Model value |
|---|---|---|---|
| Solid path | 8% | 15% | €43 |
| Market, growth only | 15% | 15% | €75 |
| Market, margin only | 8% | 26% | €75 |
| Market, combination | 12% | 19% | €75 |
| Higher price | 18% | 24% | €149 |
The market price is not one unique number but a family of stories. Fifteen percent growth for ten years or a 26% margin with only 8% growth may both be possible, but both leave little room for disappointment. A higher price raises the required combination quickly. The reverse DCF does not say the share must fall; it shows how high the performance bar already is.
Limits
Results still depend on discount rate, taxes, investment and terminal value. Lower WACC or higher terminal growth can justify almost any price. Higher revenue growth can also require more working capital and CapEx; higher margins do not automatically convert one-for-one into free cash flow.
Use
The strength of the method is not a new fair-value number; it is the sorting of assumptions. You can see which future is plausible, which is ambitious and which appears only because the price is already high.
The honest question is not “Is €75 the right price?” but “Do I believe in ten years of 15% cash-flow growth, a 26% margin or a combination?” If not, the price is too high for your assumptions. If yes, you have at least named the bet.
Change forecast, WACC and terminal value until the model reaches the market price.
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