Reverse DCF (what's priced in)

Also called: implied growth, priced in, market expectations

A discounted cash flow model run backwards: instead of estimating a company's value, it finds the growth (or the yearly return) that today's share price already assumes.

Formula

Find g where DCF value per share (g) = Price; or find r where DCF value (r) = Price

Worked example

1. Example plc: $92 a share ($40bn in total), $10bn revenue, 15% free cash flow margin, no net debt
2. At a 9% discount rate, the 10-year model needs revenue growth of about 15.4% in year 1 (fading to 2.5%) to be worth $92
3. Or, at its recent 6% growth, the price implies investors accept a return of about 7% a year

How to read it

If the growth the price needs is far above what the company has achieved, a lot of optimism is priced in. Shown on every company page under the bear, base and bull cases.

See it with real numbers: Any company page → (free account)