Term · Valuation
Reverse DCF
In briefA reverse DCF works backwards from today's price and reveals which growth and margin assumptions the market has already priced in. For story-driven small caps, it exposes whether an unrealistic future scenario is already embedded in the price.
Definition
Works backwards from the current price and shows which growth and which margin the market is already pricing in.
How it is calculated
Formula. Iterative backward calculation within the DCF model: which revenue growth / which margin justifies today's price?
Why it matters for small caps
For story-driven small caps, it exposes whether the price already assumes an unrealistic future scenario.
Common misreadings
- It is mistakenly understood as a pure valuation method - in fact it is a plausibility check of market expectations.
In the process
Frequently asked
What is a reverse DCF?
It is a reversed discounted cash flow model that does not calculate value but reveals the expectations embedded in the price. It asks what the market is already assuming.
How do you carry out a reverse DCF?
You vary revenue growth and margin in the DCF until the model produces today's price. This reveals the assumptions implicitly priced in.
What is a reverse DCF really for?
It is less a valuation method than a plausibility check of market expectations. This allows you to test whether the priced-in assumptions are realistic.
Related terms
Sources
Primary
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.