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Reverse DCF: Another Way to Evaluate Stocks

May 29, 2013 | About:

We have made further improvement to our DCF Calculator. Now you can evaluate the stock with Reverse DCF in one click.

With Reverse DCF what you get is the growth rate of free cash flow that company needs to have to justify its current stock price. The default input parameters are:

1. Earnings per share: The EPS from the past 12 months

2. Years of growth at the growth rate: 10

3. Terminal growth rate: 4%

4. Discount rate: 12%.

These parameters are the same as in DCF Calculation. All of them are adjustable and adjusting any of them will trigger re-calculation. The 10-year average growth rates of revenue, earnings, EBITDA, FCF and book value are provided for you to compare.

After you get the growth rate, compare it with the past growth rates and ask yourself if the growth rate is likely for this company. If the calculated growth rate is higher than the past growth rates, the stock price might be ahead of itself. If the growth rate is lower than the past growth rates, the stock might be undervalued.

Similar to DCF Calculator, Reverse DCF works well for the companies with predictable revenue and earnings growth.

Consider Apple (NASDAQ:AAPL): The company has growth its revenue by 38% a year and earnings by 85% a year over the past 10 years. Assuming it will grow 20% a year over the next 10 years, the DCF Calculator thinks the stock is worth $1,192 a share. Please see the screenshot below.

AAPL-DCF.JPG

Of course, whether the company can continue to growth 20% a year is a big question. Now if we switch to Reverse DCF, it tells us that the current Apple stock price of $443 a share suggests that the market thinks the company will only grow its earnings 4.85% a year over the next 10 years. See the screenshot below:

AAPL-RDCF.JPG

Will Apple be able to grow at 4.85% a year over the next 10 years? This is the question one needs to answer when it comes to using the Reverse DCF Calculator.


Rating: 3.4/5 (18 votes)

Comments

alan.fanny0823
Alan.fanny0823 - 3 years ago    Report SPAM
Wow, thanks so much. That calculator is really helpful for me.
mocheng
Mocheng - 3 years ago    Report SPAM
my browsers keep on freeze when i use this tool, not sure why, this happens on both google chrome and ie9.
gurufocus
Gurufocus premium member - 3 years ago
hi Mocheng,

please try again. We fixed a bug.
hanksterr
Hanksterr - 3 years ago    Report SPAM
AMZN has a growth rate of INFINITY.

Huh, Please explain.

Is this because your calculator crashed or what?
ney123456789
Ney123456789 premium member - 2 years ago
In amazon´s case It must be because it´s earnings per share are negative in long term. so technically it can´t calculate a return. That´s why it shows infinite
raznarizona
Raznarizona - 1 year ago    Report SPAM

why is the terminal growth rate set at 4%?

tanlihan1995
Tanlihan1995 - 6 months ago    Report SPAM

Hi what does the percentage of margin of safety mean? Isit just to tell us the value of the margin of safety considered due to the parameters given or..? and what does a postive/negative value mean? thanks!

DrKrullebol
DrKrullebol premium member - 2 months ago

Time to update the sample calculation . . . .

Please leave your comment:


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