reverse-dcf

Compute enterprise value from market cap plus net debt, estimate base-year FCFF from operating cash flow minus capex, build WACC from risk-free rate, beta, and ERP, then solve the two-stage DCF equation for the explicit-period growth rate g1 that matches the actual EV.

Forward DCF takes assumed growth rates and outputs a fair value, which can be tuned to fit any conclusion. Reverse DCF takes the market price as given and outputs the implied growth expectation, producing a concrete, verifiable number comparable with historical reality.

No, standard two-stage DCF produces meaningless results when base-year FCFF is negative. Use the PS implied-revenue reverse method instead: assume a terminal PE and net margin, then back out the revenue needed in 10 years and its implied CAGR.

The recommended method is FCFF = CFO minus capex plus after-tax interest expense, using audited operating cash flow. Cross-validate with the NOPAT bottom-up method (NOPAT + D&A - capex - working capital change) and average the two results.

Terminal value often exceeds 50% of EV for cyclical stocks, base-year FCFF selection (peak vs mid-cycle) drastically changes results, and D&A and capex estimates are limited by disclosure granularity. It reveals market expectations, not whether those expectations are correct.

Use mid-cycle FCFF rather than a single peak or trough year as the base, since base-year selection dominates the result. Consider replacing the Gordon Growth terminal value with an Exit Multiple based on industry median EV/EBITDA.