Reverse DCF

A discounted cash flow usually runs forward: forecast the cash flows, discount them, arrive at a value, compare it with the price. The reverse form runs the other way. It takes the price as given and asks what the business would have to do for that price to be fair. The question a dossier asks first is not "what is it worth?" but "what do I have to believe to pay this?"

What it measures#

Given trailing revenue, a starting free-cash-flow margin, a margin path to a terminal level, a cost of capital, and a perpetual growth rate after the explicit horizon, the instrument solves for the revenue growth rate that makes the present value of the cash flows, less net debt, equal the market value of the equity. It can equally hold growth fixed and solve for the terminal margin. The output is a statement of the form "at this price, the market is paying for ten years of thirty-one percent compound revenue growth ending at a thirty percent margin", which is something a reader can judge against history, peers, and the size of the addressable market.

Assumptions#

The cost of capital and the perpetual growth rate are the author's inputs and are tagged as such in every artifact. The margin path is linear from today's margin to the terminal margin over the horizon; a business whose margins expand early or late will be misdescribed by a straight line, and a dossier that knows this says so. Reinvestment follows a sales-to-capital ratio, so growth costs capital instead of arriving free. Net debt is the balance-sheet figure at the as-of date, and dilution beyond the diluted share count is ignored unless the memo states otherwise.

When it misleads#

The implied growth rate is sensitive to the discount rate and to the terminal growth rate, which is why every dossier publishes two sensitivity grids rather than one number. A business with negative free cash flow in its early years, common in the buildout, can produce an implied growth rate that lies outside the search bounds; the artifact then reports no solution in bounds, and the memo treats that as information rather than an error. Finally, the instrument says nothing about whether the implied path will happen. It only makes the requirement explicit.

How the lab uses it#

The reverse DCF opens the valuation section of every dossier. Its implied growth rate is set beside the company's own history, the peer set's growth, and the market it sells into, and the memo argues whether the requirement is plausible, demanding, or heroic. The scenario tree that follows is built so that its base case can be compared directly with the implied path. The demo below runs the same solver on illustrative inputs so the sensitivities can be felt by hand.