A reverse DCF calculator works backward from the share price. You enter the price, share count, free cash flow, net cash and the return you require, and it solves for the annual free cash flow growth the market is already baking in. Then the question becomes simple: can this business actually grow that fast?
Reverse DCF calculator
Implied free cash flow growth
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The numbers prefilled above are an illustrative example company, not a real stock: a $150 share price, 500 million shares, $2.5 billion of free cash flow and $2 billion of net cash. That is a $75 billion company trading at 30 times free cash flow.
How to use this reverse DCF calculator
- Enter the share price and share count. Type the current share price and the diluted shares outstanding, in millions. Together they give the market cap.
- Enter free cash flow and net cash. Add trailing twelve month free cash flow in millions, and net cash (positive) or net debt (negative) from the balance sheet.
- Set your discount rate. Use the annual return you require to own the stock. Most investors use something between 8% and 12%.
- Choose the forecast length and terminal growth. Ten years with 2.5% to 3% terminal growth is a sensible default for a mature business.
- Read the implied growth rate. The calculator solves for the yearly free cash flow growth the price requires. Judge whether that bar is easy, hard or heroic for this business.
Every result updates as you type. There is no submit button. Change one input at a time and watch how far the implied growth rate moves. That movement is the most useful thing the tool will show you.
The reverse DCF formula
A normal discounted cash flow model starts with a growth rate and ends with a value. A reverse DCF starts with the value the market has already set and solves for the growth rate. The machinery is identical.
Target enterprise value = Market cap − Net cash
FCFt = FCF0 × (1 + g)t
Terminal value = FCFN × (1 + gT) ÷ (r − gT)
Value = Σ FCFt ÷ (1 + r)t + Terminal value ÷ (1 + r)N
Here r is your discount rate, N is the number of forecast years, gT is terminal growth and g is the unknown. The calculator tries a growth rate, computes the value, compares it with the target and narrows the range. It repeats that (a method called bisection) until the two match almost exactly. A higher growth rate always produces a higher value, so there is exactly one answer when free cash flow is positive.
We subtract net cash because the market cap pays for two things: the operating business and the cash sitting on the balance sheet. Only the operating business produces the future free cash flow, so that is what the growth rate has to justify. For a company with debt, the adjustment runs the other way. See market cap vs enterprise value for why.
Worked example
Using the example inputs, the target enterprise value is $73 billion ($75 billion market cap minus $2 billion of net cash). At a 10% discount rate, 10 forecast years and 3% terminal growth, the calculator returns implied growth of about 12.2% a year. Free cash flow would need to climb from $2.5 billion to roughly $7.9 billion by year ten, a little over three times today's level.
Now the valuation question is concrete. Has this company grown free cash flow at 12% before? Is its market big enough to keep doing it for a decade? What happens to your return if it manages 7%? You can check the first question with our CAGR calculator using the company's free cash flow from ten years ago and today.
How to choose the inputs
Free cash flow
Start with trailing twelve month free cash flow: operating cash flow minus capital expenditures. Two adjustments matter. If the company pays heavily in stock, consider subtracting stock-based compensation, because that cost is real even though it never touches cash. And if the last twelve months were unusually good or bad, use a normalized figure, such as a three-year average. Owner earnings is another way to think about the right base.
Shares outstanding
Use the diluted share count, which includes options and restricted stock that will become shares. A company that keeps issuing stock has a hidden cost the model will miss. Read more on dilution.
Net cash or net debt
Take cash and short-term investments and subtract total debt. Enter a positive number when cash is larger and a negative number when debt is larger. For a heavily indebted company this input can move the answer a lot.
Discount rate
This is the return you need to make owning the stock worthwhile. Academic models use the weighted average cost of capital (WACC). Most individual investors simply use their required return, usually 8% to 12%. Use a higher rate for riskier, less predictable businesses. Because the output is sensitive to this input, try at least two rates.
Forecast years
Ten years is the standard. Use fewer for a company whose advantage may not last, and more only if you genuinely believe the business can keep growing faster than the economy for that long.
Terminal growth
This is the growth rate assumed forever after the forecast. It should sit at or below long-run economic growth, so 2% to 3% is typical. No company can outgrow the economy forever, which is why values above 4% are hard to defend.
How to read the result
The implied growth rate is a bar the business has to clear. Roughly:
- Below 0%: the price assumes free cash flow shrinks. If the business is simply stable, expectations are low.
- 0% to 5%: an easy bar for a healthy business that grows with the economy.
- 5% to 10%: a moderate bar that needs steady market share gains or price increases.
- 10% to 15%: a demanding bar. Check the company's own track record and the size of its market.
- 15% to 25%: a hard bar that needs a long runway and a durable economic moat.
- Above 25%: heroic. Very few businesses compound cash flow that fast for a full decade.
These bands are rough guides, not rules. A young company in the early lifecycle phases can clear a bar that would be impossible for a mature one. That is why the answer has to be judged against the specific business.
Common mistakes
- Using a single discount rate. Run 8%, 10% and 12% and look at the range.
- Feeding in one unusual year. A working capital swing or a one-time tax payment can distort free cash flow for a year.
- Mixing units. Shares, free cash flow and net cash are all in millions here. Enter billions and the answer will be wrong by a factor of a thousand.
- Ignoring dilution. Basic share counts understate the market cap for companies with large stock awards.
- Treating a low bar as a buy signal. A price that implies 3% growth for a business in decline is still a bad deal.
Limitations
A reverse DCF is only as good as what you feed it. Garbage in, garbage out. It also assumes growth arrives at a steady rate, while real companies grow in bursts and slowdowns. It does not work well for companies with negative or tiny free cash flow, because there is no meaningful base to grow. For those, think in terms of revenue growth and the free cash flow margin the business could reach at maturity. And it says nothing about quality. The implied growth rate tells you what the price expects. Whether the company can deliver is a separate question about the business. For the other direction, see our DCF calculator and the guide to DCF vs reverse DCF.
Run a reverse DCF on a real stock
Finding clean inputs is the slow part. Stock Simplifier fills them in from real financial data (sourced from Fiscal.ai) for the stock you pick: the current price, the diluted share count, trailing free cash flow, revenue and free cash flow margin. You set the discount rate, terminal growth and a horizon from 3 to 20 years, and you can split growth into a near-term rate you know and a later rate the tool solves for. You can also re-base free cash flow to a normalized margin, which helps with companies whose current margin is depressed.
The Reverse DCF sits in the valuation section on the Pro plan ($39.99 a month or $399 a year), along with a forward DCF and TAM valuation. Pro includes a 7-day free trial. The Free plan does not include the DCF tools, but it does give you 5 years of financials on 10,000+ stocks, which is enough to find free cash flow and shares for this calculator by hand.